Biggest Mistakes That People Make When Mutual Fund Investing

Mon, Jun 13, 2011

Financial Advice, Investment

Sometimes mutual fund investing is not as simple as it sounds. Lots of people buy a fund for their retirement portfolio and hope the performance is good enough they can retire one day. This is a losing strategy. You don’t just want to leave retirement planning to chance. In order to help you select the right mutual funds for your retirement, you need to avoid making the same mistakes that other investors make. Over the next week, I will take a look at the biggest mistakes that fund investors make.

Mistake Number 1: Figuring that a fund is good because you have heard of the fund company

Fund companies typically sell hundreds of different funds on a daily basis. A fund company could have several funds that are solid investments and several other funds that are money losers. You have to do your homework first to make sure that you are buying mutual funds that are making good use of your money and not just placing your investment capital.

Take Fidelity Funds for example. Fidelity is a name brand fund company that lots of investors have heard of. Since Fidelity has name recognition, investors may be tempted to place their money in any mutual fund and start reaping the rewards of capital appreciation. That would be a mistake.

If you had purchased this Fidelity Fund over the past decade, you would have lost money. Your $10,000 investment would now be worth just $8,400 over the past 10 years. That is significantly less than what you had started with.

Fidelity Growth & Income (FGRIX)

Conversely, if you had purchased this fund over the past decade, you would be sitting pretty. Your $10,000 investment would now be worth $26,000. You would have actually increased your investment capital.

Fidelity Capital & Income (FAGIX)

It’s amazing how close the names are of the Fidelity Growth & Income Fund and the Fidelity Capital & Income Fund. The fund’s investment objectives, portfolio composition, and results however have been drastically different. Mutual funds can have similar names but have totally different performance results.

Generic terms like growth stock fund or bond fund can represent a whole number of different investment styles. One fund manager may think that a growth stock fund means a portfolio of large cap names like General Electric, Apple, and Nike. Another fund manager may deem small cap companies like Buffalo Wild Wings, Great Wolf Resorts, and Blackboard as growth stocks.

That is why you need to do your research before investing. Look at the five year and ten year historical performance of the fund. Check out the investment holdings of the portfolio. Do the assets in the portfolio look overvalued to you? Is there still growth left in this portfolio? Those are just a few of the questions you should ask when trying to distinguish one fund from another in the same fund family.

Remember that every fund company has winning funds and losing funds. There are always some investors keeping losing funds in business with their money. Any fund can have a bad year but if your mutual fund has had a bad five to ten years, you need to abandon ship.

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