Deferred sales charges (DSCs) may have been the mutual fund industry’s greatest marketing innovation. Back in the 1980s, it wasn’t unusual for funds to be sold with front-end loads of 5% or more. Then fund companies realized it’s a mistake to charge an entry fee that discourages people from buying your product. Better to draw them in for free and charge them dearly to leave: DSCs typically start at about 6% and continue on a sliding scale for six or seven years, with no time off for good behaviour.

For investors who have six-figure mutual fund portfolios, the cost of selling funds with DSCs is downright painful: in our DIY Investor Service we have worked with clients who have had to swallow more than $5,000. There are no doubt countless others who want to break free of a bad relationship and start fresh with a low-cost portfolio of index funds, but who just can’t bring themselves to fork over those DSCs. They’d prefer to sell their funds gradually over two or three years in order to reduce the upfront cost.

That’s understandable, but in most cases it’s probably the wrong decision. While there may be ways to make a gradual exit, it’s usually better to simply pay the penalty and make a clean break. It hurts to rip off the bandage quickly, but it’s preferable to prolonging the agony. The pain goes away quickly once you’ve implemented a new low-cost portfolio with all of your assets.

Breaking free and breaking even

If you’re planning to set up a new ETF portfolio and manage it on your own, the amount you pay in DSCs will be immediately offset by huge savings in management fees. Let’s say you have a $100,000 portfolio of mutual funds with an average MER of 2.5%. Your salesperson tells you the funds carry a 4% deferred sales charge, which means selling them will cost you $4,000. You might be tempted to wait a year or two for that DSC to drop to 3% or 2%. But remember, if you move immediately to a portfolio of index funds with an MER of 0.5%, you’ll save about $4,000 in management fees in the first two years alone—and that’s assuming your portfolio doesn’t grow during that time.

It’s not just the math: there is also a huge psychological benefit to severing ties with crappy investments. You might be able to save some money by selling your DSC funds gradually (Justin Bender has outlined a strategy for doing so), but the process is time-consuming and demoralizing. I’ve even encountered investors who drew up a schedule for redeeming their mutual funds gradually but never followed through. Best to acknowledge those fees as a sunk cost and allow yourself to get excited about what lies ahead.

A taxing question

Fear of taxes can also delay implementing a new portfolio. These days one of the biggest obstacles is a reluctance to realize capital gains: after several years of outstanding equity returns, even mutual funds charging 3% have seen big gains, and selling them now is likely to come with a tax bill. But again, the short-term pain is worth it in the long run. By switching to an ETF portfolio you create opportunities for tax-loss selling, and if we do experience a market correction you’ll be able to harvest some losses and carry them back for up to three years, potentially reducing that initial tax hit.

If you’re sitting on a portfolio that’s concentrated in three or four stocks with big gains, the decision should be even easier. The capital gains tax is a small price to pay for dramatically reducing your risk by moving to a more diversified portfolio.

No time like the present

Finally, almost everyone who implements a new portfolio worries about whether market conditions are favourable for a big move.

Let’s remember that if your mutual funds have a similar asset allocation to the new portfolio you’ve planned, this is a non-issue: you’re not changing your market exposure at all if you’re moving from a high-fee Canadian equity mutual fund to Canadian equity ETF. You’re either selling low and buying low, or selling high and buying high, so your timing makes no difference. I like to compare this decision to finding a better deal on car insurance: if you were offered more coverage and lower premiums, would you hesitate to make the switch?

If your asset allocation will be changing significantly—it’s not unusual for mutual fund salespeople to put clients in absurdly aggressive portfolios—the situation is different. But in most cases you should still implement the whole portfolio at once. Dollar-cost averaging with a lump sum is appealing to many investors who think it reduces risk, but that’s largely a myth: in most cases it just ends up resulting in lower returns. It also turns one anxiety-inducing decision into many.

It will never feel like a good time to invest a large sum of money. Just consider the last five years: after the financial crisis, when stocks were cheaper than they have been in a generation, many investors wanted nothing to do with them. Now that they have reached all-time highs, just as many are afraid of a looming correction. If you have a well-formed financial plan and a target asset mix that is suited to your goals and temperament, the best time to implement your portfolio is always now.