How to Avoid Bad Mutual Fund Investments

People spend a lot of time and effort trying to steer clear of certain things: traffic, bad movies, and sub-par restaurants come to mind. But none of these experiences, no matter how unpleasant, can be as expensive as a bad mutual fund investment. They must be avoided at all costs!

The good news is that there are solid, common sense strategies that you can put in place right now to avoid bad mutual fund investments. The key is to pay attention and be objective as you evaluate your funds. Follow these four simple concepts for establishing and upgrading your mutual fund portfolio, and you should see your investment performance improve significantly over time.

Start With a Solid Asset Allocation Plan
Perhaps the most important factor in avoiding bad mutual fund investments is to select the right asset classes for current market conditions. In most cases, a diversified portfolio including domestic stock, international stock, bond, specialty, and money market funds is appropriate. But how much do you allocate to each asset class? That’s the key question, and professional help in this area probably makes sense.

Pay Attention to Momentum
Buying a mutual fund and holding it through thick and thin is a sure recipe for underperformance. If you truly want to avoid bad mutual fund investments, you have to be ready to upgrade your holdings to funds that are gaining momentum under current market conditions. Remember, sometimes selling a bad mutual fund can be a more important factor to your performance than buying a good one.

Don’t Be Shackled by Psychological Handcuffs
If it’s time to sell and upgrade from a mutual fund that’s lagging, do it! Don’t hold a fund too long simply because it’s one of your “favorites” or it has a short-term redemption fee. The investment merits of the switch almost always outweigh these factors, including any 1.5% or 2% fee. Of course, be reasonable. If you are within a few days of the expiration of the fee period, you may want to wait. But if it’s a month or more, pull the trigger.

Don’t Buy Long-Term Performers Blindly
There are plenty of funds out there with good long-term track records that lag the leaders for long periods. It doesn’t mean they are bad mutual funds investments, but that there are other funds better suited to current market conditions. You can do better! Take the time to see which funds are hot–and which are not. It can make a huge difference in your long-term returns.