Buying Mutual Funds – 3 Tips for Diversifying Your Investment Portfolio


These tips for buying mutual funds and diversifying your investment portfolio are from financial expert and author Charles Sizemore, of Sizemore Capital Management. He’ll help you avoid the common money mistakes many investors make!

Before the tips, here’s a quip about investing your money: “October:  This is one of the peculiarly dangerous months to speculate in stocks.  The others are July, January, September, April, November, May, March, June, December, August and February.” ~ Mark Twain

It’s the truth, my friends: if you’re investing your money in mutual funds or stocks, you have to be prepared to for the dangerous possibility of losing it! But, these tips from Sizemore will help you avoid the pitfalls.





2 Common Mistakes Investors Make With Mutual Funds

1. Perhaps the biggest mistake investors make is “chasing” returns.  They tend to buy whatever fund was hot last year.  The problem is, last year’s winner is often a poor choice for the following year.  You need to go deeper in your analysis that simply picking the best performer from last year!

2. Anyone who has ridden the subway in London has heard the expression “Mind the gap!” blared over the loudspeakers.  When it comes to mutual funds, investors should “Mind the fees!”  High sales loads and ongoing management fees can really erode your profits over time.  There are a lot of quality funds with low management fees and low or no sales loads.

Diversify Your Investment Portfolio With Mutual Funds

Mutual funds are generally diversified within their sectors.  In other words, a good large-cap growth funds is well diversified among several good, large, growth stocks.  But what about small caps?  What about international stocks?  What about REITS or bonds?  Stocks within a given sector often move together.  So, to get better portfolio diversification, you need a good mix of funds from different sectors.

3 Tips for Buying Mutual Funds

1. Mind the investment fees. There are many quality funds with low management fees and low or no sales loads.

2. Take a look at the funds’ largest core holdings.  If the fund has a large position in, say, Microsoft, make sure that you are comfortable with this.  Even great managers make very bad buys from time to time.  Read 6 Ways to Take Control of Your Finances if you buy a poorly performing stock, bond, or mutual fund.

3. Consider how well a fund has performed in different kinds of markets.  In a bull market, how did the fund do?  What about during a bear market, like 2008?  Sometimes, fund managers achieve higher returns only by taking higher risks.  You need to see how they perform in a bear market to see what their risk control is like.

Surprising Facts About Investing in Mutual Funds

  • You can lose money in a mutual fund…and yet still have to pay capital gains taxes!  This happens when a fund sells an old position.  You pay taxes on gains that you never cashed in or enjoyed!
  • Sometimes a fund’s historical returns are the work of an ex-manager who no longer works for the company. For instance, consider the Fidelity Magellan fund after Peter Lynch retired.
  • The best strategy for investing money for long-term growth isn’t to do what every other investor is doing. Do the opposite, and you’ll not only diversify your investment portfolio, you’ll earn more money.

What are your tips for about investing in mutual funds? Please comment below…



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Charles Lewis Sizemore, CFA, is the Chief Investment Officer of Sizemore Capital Management, LLC . 







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7 thoughts on “Buying Mutual Funds – 3 Tips for Diversifying Your Investment Portfolio

  • Laurie Post author

    The problem we’re having is that nothing seems like a good investment – except our home mortgage! We bought our house for almost 1.1 million dollars; the guy we bought it from paid $700,000 for it a few years earlier. He kept it in top notch shape and it has gorgeous views of the Pacific Ocean, so it’s worth a million bucks.

    So instead of diversifying our investment portfolio, we’re putting every extra cent into paying down the principle of our mortgage. When it’s paid off, we may sell it….but I love this house so much, I can’t see me leaving unless I’m in a coffin!

  • Barney

    Diversification within your portfolio is essential for everyone from the professional to the person who never cares to look at how the portfolio is actually performing. Mutual funds are a great investment to add to your portfolio. I also agree with the comments that you are able to save some money and invest it if you put your mind to it. The return that you could earn will be worth it.

  • Willy

    Stop wasting your money at Starbucks and Walmart, and put that money towards mutual funds or your 401k. A little bit of money adds up over a realatively short period of time.

    I invest $25 every two weeks in my retirement fund.

    Willy

  • Laurie Pawlik-Kienlen Post author

    Even an extra $25 a month or $10 a week can go towards buying mutual funds. I think many (if not most) people can find ways to find $6 a week, by not eating out or buying unnecessary items….and that $24 at the end of the month can go towards an investment.

  • Laurie Pawlik-Kienlen Post author

    Thanks for your comment, Alex — yes, diversification is a really important way of reducing risk when buying mutual funds.

    Another tip is to hire a financial advisor you trust, who isn’t too busy to review your portfolio regularly and give you financial advice.

    My problem is that I have no interest in investing money! Even looking at my mutual funds every 3 months is proving to be tedious; I just don’t do it. But, I know it’s a mistake to expect my financial advisor or my husband to be responsible for my mutual funds…..I need to be more financially responsible.

    Anyway, thanks for your comment — it’s prompted me to revisit my portfolio today!

    Laurie