What are the most common mistakes people make when investing in mutual funds?
When it comes to mistakes relative to investing in mutual funds, one of the biggest is not having a reason why you're actually looking at this fund, not having a set goal on how this fund plays into the overall aspect of your portfolio. And what's driving that are really, many times some of the other problems with mutual funds, is – and it's – number one is buying based on past performance. Everyone hears it, that past performance is no indication of future performance, but yet no one believes it. But it's so true, that so many people buy mutual funds because of their past performance. But any investment is going cycle through good times and bad times. And so not having a reason to buy a fund and only buying on past performance, is really gonna – what it's going to do, is it's going to create a portfolio of funds that look very similar. You don't have your broad diversification there. That's one of the key problems we see is a past performance. And that relates to other indications, people might buy based on it's rating. There's independent rating companies out there, and they say, “Well, it has a good rating by whoever.” The problem is, is that those ratings are almost always based on past performance also. Another concern with this is if a fund has a lot of turnover, means it turns over stocks a lot, it's going to be very tax expensive for you. Returns are illustrated, or shown, on an absolute basis, or a total return basis. They're not shown net of taxes. So if you have a fund that has a high turnover, you're, especially if you're a high taxpayer, your net result could be much lower than what you would be getting on fund that has maybe lower historical returns, but much less turnover. So that's another key issue that most people miss, is where that turnover might be. Another thing I think that people miss is if you're buying a fund, especially if performance is a key issue, is how long is the manager been at the helm of that fund, because if it's really an actively managed fund, where the manager is in there picking and choosing the stocks, if that manager's left, and a new manager's there, that past performance is really tied to the manager's performance, not actually the mutual fund's performance. So that's another key thing we want to look at. The mistake most: people don't look at is manager tenure as it relates to the performance they're looking at at a fund. So once again, this all ties back to performance, which should really be one of the last considerations you're looking at with a fund. But the big mistake is putting that up front and then not realizing how that may affect you. Lastly, another consideration is if a fund is very trendy and you're buying it because it's a very trendy fund, if that fund goes out of trend; there might be a lot of people that leave; pull their money out of the fund, and if you want to stick with it as a long term investor, that could be very damaging to you once again from a tax perspective. The manager must sell securities to pay out the people that are leaving the fund. You will actually end up paying the taxes as a result of those trades. So trendy funds, a fund that just gets a lot of money really quick, probably is going to lose a lot of money really quick, because it's a hot fund, Hot funds are dangerous for long term investors.
