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 .