Marshall Loeb provides the list of five big mistakes mutual fund investors make. We provide the commentary.
Chasing performance - Don't buy last year's hot funds. Studies show that funds that are currently at the top of the performance heap have less of a chance of beating the average fund return going forward than funds that did less well.
Paying commission - Don't pay loads. Ever. There are perfectly good no-load alternatives for each fund that charges you 5.75% of your money for the privilege of investing in it.
Paying excessive fund expenses - When it comes to fund expenses, the cheaper the better. Fund expenses eat away at your returns. It's usually the cheapest funds that make you the most money long-term.
Buying funds with high turnover ratios - A high turnover ratio is generally bad for a fund to have because excessive trading produces larger commission fee expenses, higher income and capital gains distributions, and might imply a lack of a clear investing focus by the fund manager. The industry average turnover ratio is 102%. We generally prefer funds that don't exceed 65%.
Having inadequate diversification - Basically, the idea behind diversification is to spread your money among many different investments as the chances of them all going bad at once is pretty remote. Purchasing even a single mutual fund automatically provides a certain level of diversification by taking your money and investing it across all the stocks and bonds the fund owns. The problem is that many mutual funds invest in a single sector or country - technology stocks, financial companies, or Chinese equities, for example - and very often all the companies in a particular sector or industry rise or fall together. Therefore, your best bet is to buy a few different funds that concentrate in entirely different fund categories. And, depending on your risk profile, it is also a good idea to keep a certain percentage of your money in bonds and some in cash.
You can check a fund's performance history, expense ratio, turnover ratio, and whether or not it is a load fund or a no-load fund, by entering its ticker into the Fund-o-Matic. (MAXfunds.com is also the only place where you can instantly compare a fund’s expenses to similar funds INCLUDING an adjustment for hidden portfolio-level expenses resulting from trading. Check each fund's MAXrating: Expenses for the complete expense picture.)
What Not To Do
Marshall Loeb provides the list of five big mistakes mutual fund investors make. We provide the commentary.
LINK
You can check a fund's performance history, expense ratio, turnover ratio, and whether or not it is a load fund or a no-load fund, by entering its ticker into the Fund-o-Matic.
(MAXfunds.com is also the only place where you can instantly compare a fund’s expenses to similar funds INCLUDING an adjustment for hidden portfolio-level expenses resulting from trading. Check each fund's MAXrating: Expenses for the complete expense picture.)
See also: MAXuniversity Part III - MAXfunds.com's Seven Rules of Mutual Fund Investing.