Mutual Fund Myths
Investment Professionals have been providing advice and answering questions for generations of Canadians since the inception of mutual funds. While these days the average investor is much more knowledgeable about financial issues than ever before, it is often reported that a few misperceptions regarding mutual funds surface time and again. Likely, these myths are perpetuated by the media which tends over over-simply financial matters. To set the record straight, the following highlights some of the myths, and then sheds some light on the reality behind the perception.
Myth: The best way to diversify is buy as many different mutual funds as possible.
While spreading your portfolio thinly across many funds might achieve diversification to some degree, it is likely at the expense of performance, fees and focus. Your choice of mutual funds should be tailored to your objectives. How long before you retire? How risk tolerant are you? These kinds of questions should determine the selection of investments, including mutual funds, best suits you. A large number of mutual funds alone isn’t the answer. In fact, it becomes less manageable to track the performance of each fund if there are too many. Diversification is better achieved through an analyzed and strategic selection of funds. Consider, for example, asset allocation mutual funds. These funds are configured with diversity as the primary benefit; with investments dispersed across different asset classes such as stocks, bonds and fixed-income instruments. This way, if one asset class suffers a loss, chances are the loss will be offset by a rising return in another asset class. Choosing the right, not the most, funds is the best way to diversify.
Myth: The way to beat the market is to get in (or out) at the right time.
There is always temptation to sell-off a portion of your funds when the market shows signs of volatility. The theory is to sell just before the market drops, and then buy again just before it rises. If only life were that simple. Unfortunately, no one can predict precise market timing, and more often than not, investors who try this approach get burned. History has proven time and again that investing with a long-term view produces better results in the long run.
Myth: It’s good enough to wait until February and then buy mutual funds with any extra savings.
One of the great advantages of mutual funds is the ability to purchase them in small units. This allows the investor to make regular contributions throughout the year, and proves to be the superior method for mutual fund purchases. First of all, Iit imposes a measure of discipline that most of us need to ensure we are setting aside enough money for a decent retirement. Secondly, it allows the investor to take advantage of ‘dollar cost averaging’, a strategy whereby selected mutual funds are purchased regardless of the price of the fund. This way, if the fund goes down you can buy more of it, thereby strengthening your fund position when the prices rise again. On the other hand, if the fund price rises, your current holdings benefit. Could we add something that refers to PACs as a seamless forced savingsThe point is: the best way to buy mutual funds is to set aside an affordable monthly contribution and stick to it.
Myth: The nice thing about mutual funds is you don’t have to pay attention to them.
Many people get caught up in the daily running of their lives, and neglect monitoring their investments. However, It’s critical to follow the progress of your funds, and it’s easy! The mutual fund companies are an excellent source of information, as well as your newspaper, and of course, your Investment Professional. If there is a significant change in your personal situation (loss of job, purchase a new house, the arrival of children) you should review your investment objectives and determine whether changes to your strategy are warranted. The truth is you should always pay attention.
Myth: The best way to pick a mutual fund is to pick a top performer in the last year.
While past performance can be a very good indication of the fund manager’s ability to generate superior returns in one year, it is not necessarily a sure bet for another year. It is therefore much more preferable and advisable to evaluate a fund based on it’s long-term track record. Keep an eye on the consistency of the fund. These are much better criteria to measure against. Also, when you rate past performance, keep in mind market conditions at the time.
In summary, give your portfolio the attention that it deserves, and remember that a qualified Investment Professional can help provide objective and sound advice, and can answer any questions that you might have.
This article was prepared by Fidelity Investments for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management, Inc.
Read a fund’s prospectus and consult your investment professional before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions, and may experience a gain or loss.
Tags: asset allocation, Investments, Mutual Funds
This entry was posted on Tuesday, October 20th, 2009 at 11:06 pm and is filed under Investments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
