Covering Common Mutual Fund Investing Mistakes

From getting your finances in order to selecting funds to maintaining your portfolio over time, various potholes and dangers will get in your way. Here are some common mistakes you're likely to make and tell you how you can sidestep them.

Lacking an overall plan

Just as you shouldn't build a house without an overall plan, you shouldn't start buying funds until you have your arms and mind wrapped around a sound financial plan. It need not be a fancy, professionally or computer-generated one. But it should include such basics as

• Proper insurance coverages, like health, disability, auto, home, excess liability if you hold sufficient assets, and life insurance if others are dependent upon your income

• A plan for paying off consumer debt on credit cards and auto loans, if you have any

• Savings goals for retirement, buying a home, starting a business, putting your kids through college, and anything else your heart desires

• An overall asset allocation — what portion of your money should be invested in different assets, such as stocks (foreign versus domestic), bonds, and so on.

Failing to examine sales charges and expenses

Would you ever buy a car without considering its sticker price? How about checking out the car's safety record and insurance costs? Mutual funds are like cars in one respect — you have to check under the hood before you buy. But the good news is that fund fees are actually a lot easier to comprehend compared to the various car costs.

Before you consider buying any mutual fund, be sure you understand precisely any sales charges as well as the fund's ongoing operating expense ratio. Over the long term, a fund's fees are one of the biggest (and most predictable) determinants of the fund's likely future returns. This point is especially true with boring old money market and conservative bond and stock funds.

Chasing past performance

Before anyone hires a job applicant, he likes to know that person's track record. Ditto for professional sports teams seeking new players. Of course, when hiring a money manager, which is what you're doing when you invest in a mutual fund, you should examine that manager's prior experience. However, many investors simply throw money at funds currently posting high return numbers without thoroughly examining a fund manager's experience.

More often than not, current hot funds cool off (especially as small funds get larger and market conditions change) and many underperform in the future. The reason is quite simple: The market forces that led to the relatively brief period of high performance inevitably change.

Ignoring tax issues

Do you know your current federal and state income tax brackets? When a particular type of stock or bond fund makes a dividend or capital gains distribution, do you know what rate of tax you'll pay on that?

Many fund investors aren't well informed when it comes to the tax consequences of their fund purchases and sales. Although you don't want the tax tail to wag the fund selection dog, you should know how taxes work on your funds and which funds fit best for your tax situation.

Getting duped by "advisors"

Some people want to hire a financial advisor to help them navigate financial choices. Problem is, many so-called financial consultants or advisors have serious conflicts of interest. Their recommendations and objectivity are tainted by commissions earned from products that they sell or from their money-management services.

If you seek to hire a financial planner/advisor, hire someone who's selling their time and nothing else. If what you're really looking for is someone to manage your money, then seek out a money manager.

Trying to time the market's movements

Just as no one enjoys losing a game, who among us wants to invest in a fund only to see it fall in value? Sometimes, though, that will happen even though you've done your homework and selected a good fund.

Stock and bond funds fluctuate in value, and you must accept that inevitability when you invest. Some people like examining pricing charts online to guess when a fund is about to turn around and increase in value. Don't waste your time on such unproductive and time-consuming endeavors. Identify good funds, buy into them over time, and don't jump in and out.

Being swayed by major news events

We're all human and have emotions. September 11, 2001, was a horrible day for Americans (and many other people around the world) that caused some people to panic and sell investments when the financial markets reopened. Wars, oil price spikes, large corporate layoffs, the latest retail sales and consumer confidence reports, and Federal Reserve meetings and interest rate changes are but a few of the news reports that can move the markets.

Don't make your investing decisions based upon the news of the day. The only action you should consider taking if doom and gloom are in the air is to consider using some of your spare cash and buying when a sale is going on.