Over the next few weeks, BetterInvesting will share some of the Six Rules of Successful Fund Investing as practiced by history’s best investors.
The First Rule of Successful Mutual Fund Investing:
BE AN INVESTOR IN YOUR FUNDS, NOT A TRADER
One of the most common mistakes that investors make is thinking that they can manage the risk in their portfolios by attempting to move their money out of their stocks and funds when they perceive that they market is about to decline, and then move back into the market when signs of recovery are seen.
Why do so many investors think that it’s so important to be ready to move in and out of the market on a moment’s notice? It’s largely a result of the fear fostered by the financial “experts” on Wall Street. The people who give you advice about the “best” and “worst” time to invest in the stock market are most frequently those who have something to gain from you if you follow their advice (yes, I’m thinking of brokers who are earning commissions on each trade you make).
The problem with this approach is threefold. First, if signals about the market’s future direction were so easily observed, America would be a nation of millionaires. The stock market is volatile and unpredictable in the short term, and it is impossible to predict the direction that stocks or other securities will move with any degree of accuracy. Over the long term, though, it becomes more and more likely that you will earn a positive rate of return and acceptable levels of risk.
Second, if you are investing in a taxable account (that is, outside your IRA, 401(k), or other qualified retirement plan), the higher taxes you will pay on short-term capital gains will take a big bite out of your profits. Long-term capital gains currently are taxed at no more than 15%, while short-term gains are taxed at the same rate as your ordinary income, up to 35%. Fees and commissions incurred when using a trading strategy will eat up another chunk of any profits. If you are trading, you need to be much more successful with each investing decision in order to come out ahead of long-term investors.
Third, do you have the time to actively manage your investments daily? A short-term trading strategy may require you to be engaged every day in making buy and sell decisions for your portfolio. Most people have jobs, families, and hobbies that are a more productive way of spending time than sitting in front of their computer screen watching blips and dots and graphs. If you want an electronic activity merely to fill your time, we suggest buying a Nintendo Wii or xBox video game system. In the long term, it will be much less expensive than engaging in a losing trading strategy.
Most mutual fund managers realize that it’s impossible to trade their way to success. They would like their shareholders to be of the same mindset. Fund managers want customers to provide them with the ability to prosper long term by not moving in and out of their funds, thus relieving the fund of the need to worry about massive customer outflows.
Next blog will cover rule #2: “Focus on equity funds.”
You can learn more in the How to Use the Mutual Fund Informer Guide or in the educational articles included in each issue of the Mutual Fund Informer, a new monthly mutual fund newsletter publication from ICLUBcentral that presents profiles of high-quality mutual funds with superior long-term track records. Get profiles of high-quality mutual funds at lowest subscriber rate plus sample a free issue now.
