Educational Programming Video
The Value Line Mutual Fund Survey
Program 11: Mistakes to Avoid
Over the last few sessions we've gone through a number of fund basics that every investor should know. Now we will discuss five common mistakes that every investor should avoid.
1. Not starting. The biggest mistake that many people make is never even starting to save money-if you don't start nothing else matters. Don't get bogged down in this mistake only to realize in 20 years that your retirement is going to be on a shoestring. On a similar note, make sure you keep saving. Put at least 10% of your take home salary into your savings every month. If you can, enroll in an automatic investment plan, it's worth the extra effort. Make saving part of your normal routine. Like checking your email or brushing your teeth. Saving small amounts over long periods of time is the easiest way to build a significant nest egg. And, if you have to stop saving for any reason, make sure you start up again as soon as possible.
2. Buying last year's top performer. At any given time there are funds that have posted phenomenal results. Unfortunately for the legions of investors who chase them, the same aggressive or specialty techniques that rocketed the fund to the top one year can lead to dizzying declines the next. As was the case for the slow-but-steady tortoise that beat the hare, a fund that performs consistently and lands in the top half of its group year in and year out will undoubtedly rise to the top 10% of all funds over a decade or longer.
3. Acting on hunches. Unless you have an uncanny knack for calling market trends, you are better off developing a consistent, disciplined approach and sticking to it. The most enduring trait of a successful money manager is discipline and consistency. Your brother-in-law may have some great tips, but that doesn't mean you should follow in his footsteps. Besides, most investors brag about their winners, while conveniently forgetting about their losers. You should create a long-term game plan with the assistance of a financial planner (or by using some of the web tools available online) and then buy mutual funds that fit into that plan. Forget about the market's ups and downs and focus on meeting your goals.
4. Selling too soon. Many investors fail to understand the style with which their fund is managed. When that style goes out of favor for several years, performance will suffer, but it is also likely to rebound when the style returns to favor. Many investors wind up selling a fund right before its performance improves, and moving into a fund whose relative performance is about to turn weak. One should sell, of course, if the fund is doing badly because it is not sticking to any discernible style. But, if the fund still fills the niche for which you bought it, stick with it.
5. Owning too many funds. A diversified portfolio of funds is a good idea. But investors who own dozens of funds run the risk of over diversifying. Investors who want a portfolio that behaves like the market should save themselves a lot of trouble and buy low-cost index funds. Ten to 12 funds are probably the most that any investor needs. Any more than that, and you probably won't be able to keep track of the funds in which you invest.
If you can avoid these five mistakes, you should be well on your way to financial success and security.