Mutual Fund Investing: The Dangers of Chasing Performance
- Tuesday, November 02, 2004
1. Consider choosing your funds based on which asset class the fund manager is investing in (large US, small US, short-term fixed, etc.). Academic studies indicate that nothing else is as important to your returns as the portfolio division between asset classes.
2. Keep a close eye on portfolio turnover. Excessive trading in your mutual fund can be very costly and add to your fund's level of volatility without necessarily adding to the return.
3. You might consider diversifying internationally. Studies show time and again that risk actually may be reduced with international exposure.
4. Think about rebalancing your portfolio to your original allocation from time to time. This may help ensure that portfolio risk doesn't vary excessively and can help investors avoid "chasing performance".
5. You may find that the more intolerant you are to "market risk" (volatility in the stock markets) the more tolerant you may have to be to inflation risk. Inflation is the great silent tax on portfolio values.
6. Ignore much of the financial media and their predictions. Remember, if they really knew what was going to happen next, they would likely keep that information to themselves.
An Important Closing Word...
Unfortunately, writing an article such as this is a little like using a shotgun -- you can hit a lot of folks, but the information may not be appropriate for all the readers. Most of my comments are broad-brush in nature -- intended for a wide audience. It follows that if your financial situation doesn't fall somewhere in the center of the bell curve, some of this information may not fit your needs. Let me remind you of the need to review all your investments periodically, study tax law changes that may affect you, get competent professional help, and factor in your personal circumstances. This information is simply a summary of best understanding and is not intended to be exhaustive.
Steve Diggs presents the No Debt No Sweat! Christian Money Management Seminar at churches and other venues nationwide. Visit Steve on the Web at www.stevediggs.com or call 615-834-3063. The author of several books, today Steve serves as a minister for the Antioch Church of Christ in Nashville. For 25 years he was President of the Franklin Group, Inc. Steve and Bonnie have four children whom they have home schooled. The family lives in Brentwood, Tennessee.
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