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.)
Marshall Loeb provides the list of five big mistakes mutual fund investors make. We provide the commentary.
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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.