Tips on Mutual Funds Mistakes to Avoid
Trillions of dollars are invested in mutual funds, and many of the same costly mistakes are repeated over and over by the millions of investors. We have some tips for you on mistakes you can avoid making.
Financial affairs columnist Marshall Loeb brings us these mutual funds investing tips courtesy of John Burns, CEO of wealth-management firm Burns Advisory Group in Oklahoma City.
1. Chasing performance: "People have a tendency to invest in funds and asset classes that have done well lately," says Burns, but that usually means âbuying into the tail end of their performance." The result: lower returns or entering into an investment when a fund is starting to lose money.
2. Paying commission: Burns says fund investors who pay commissions to their representatives may believe they're getting valuable advice, but are probably only paying to get access to a product. He suggests a fee-only adviser instead.
3. Paying excessive fund expenses: It's easy to see that the higher the mutual fund expense, the lower the total return. Burns says, "You can do a lot of research on your own or hire an adviser to do that. Advisers can access money managers that individuals can't."
4. Buying funds with high turnover ratios: Turnover is costly for investors, because it results in additional taxation and hidden transaction costs. Burns suggests high turnover may be a sign either that a fund manager is not confident in his investments or doesn't have a disciplined investment strategy.
5. Inadequate diversification: Burns says funds can be "underdiversified or overdiversified." Too much money in a single fund, or, conversely, too many funds with overlapping investments, will add to portfolio volatility.
Comments
These tips are relevant and precise. Well done.