9 of 15

Write now Article Tools

Page 3 of 3

that individuals can take in order avoid the fate of the average investor. Although it is clear that past performance is not necessarily indicative of future results, the historical record that a mutual fund manager generates is really the only basis you have for making investment decisions. When trying to find a new mutual fund look for managers that have a long term record and see how their fund performed over different market cycles. Finding a manager that has outperformed over long periods of time but has run into trouble lately can be one technique to avoid the bias of over emphasizing short term results. Avoid mutual funds that limit their investments to a small sector of the market as even if the manager continues to outperform other funds the sector can collapse (see oil stocks and commodity funds in the second half of 2008). Buying index funds can be a good way to avoid funds that are poised for underperformance but be sure that you are not simply selecting an index with recent outsized returns but diversifying across all asset classes. Finally, avoid constantly switching the mutual funds that you are invested in as constant changes can trigger increased fees that further lower your returns. Maintaining a consistent asset allocation by rebalancing your portfolio on an annual basis will lesson the chances that you will continually try and chase the top performers. The simple act of rebalancing will force you to sell your best performing sectors or funds and invest the cash in the sectors or funds with lower recent returns. At the very least, maintain some skepticism when presented with the next "can't miss" investment and realize that sticking with a set plan will ultimately produce better results.

Learn more about this author, Mark and Haley LaMonica.
Click here to send this author comments or questions.

• << previous page
• 1
• 2
• 3

Add your voice

Know something about What you need to know before you buy mutual funds?
We want to hear your view. Write now!