Time and time again, self-made investors don’t make the right choices. They want to build their wealth, but end up in investments that take away their hard-earned savings. Here are some classic examples of poor investment fund choices that virtually guarantee your impoverishment.
Let’s see, you can do better than that!
Chasing returns
Investing in a fund solely on the basis of its past performance is a dangerous game. The past is exactly that: it has passed, gone, gone. You will get almost no information from a fund’s past performance. It is especially critical to disregard strong short-term results that could be entirely down to chance.
We understood. Mutual fund companies love to lure you in by advertising their results (of course, only when they’re favourable). But forget that! Focus instead on things you can control: how the fund is expected to perform from the time you invest in it rather than its past achievements
Omitting the details
Too often, investors choose a fund without first reviewing it. Investment concepts 101 consist of knowing who manages the fund, the approach adopted by the management team as well as the assets under management. In your decision, you must also take into account the age of the fund, its costs and any changes made to its operation. All of these factors will influence your investing experience and there are always several aspects to consider before embarking on the adventure.
Be amazed
As due diligence, investors rely on Morningstar Inc.’s one- to five-star rating system. Again, you’re not going to pick a fund because it’s ranked number one? The star rating system is based exclusively on past performance. As dazzling as it may seem, no indicator can reveal enough about a fund to make an informed decision.
This also applies to the list of “top funds” that the media regularly present. This list can help you narrow down the search, but for practical guidelines, we’ll come back. You need to rely on more than superficial analysis for something as important as your future financial security.
Misunderstanding diversification
Isn’t it ideal to hold several funds from different companies? At least, investors are encouraged to believe it. They accepted the idea of diversification as the ultimate form of risk management. And it does if done properly. However, it is easy to oversimplify the “don’t put all your eggs in one basket” rule. “More” does not automatically equal “safer”.
There is also excessive diversification . In other words, there is an investment overdose if you hold a plethora of funds that are too closely correlated. This undermines the risk-return balance of your portfolio. It is important to understand that it is possible to hold a single fund while being sufficiently well diversified. (This is not a free advertisement to purchase an EdgePoint fund. We believe that any fund that is adequately diversified in terms of business concepts, even a fund offered by a competitor, could satisfy all your needs ).
Relying on headlines
We call this harmful state of mind that results from the barrage of negative headlines to which we are subjected. Macromatosis hits investors where it hurts the most: in their hearts and, by extension, in their bank accounts. Bad news devastates them and guides their decision-making. By acting on emotions, investors buy and sell funds at precisely the wrong time.
The cure-all for macromatosis is to stick to your investment plan, the one you created when all was calm and your thinking was rational. Place all your faith in this approach rather than trying to predict the market, an exercise that almost no one, even professional investors, manages to do.
Ride the Wave
Mutual fund companies driven by sales and marketing put their business needs first. Regardless of the flavor of the day, they market an investment product that seeks to take advantage of it. Then they flood you with mass marketing techniques. They know very well that the latest fashionable trend will be attractive to investors. To line their pockets, these companies feed investors with fear and greed at the expense of sound investment principles. Don’t get carried away by their wave.
Indeed, some of the best money managers behave as if they don’t want to manage your money. You won’t constantly see them on TV or advertise their performance.
Even better, retain the services of an experienced financial advisor with integrity. The latter is an expert in helping you contain your emotions and can give you effective advice for achieving your financial goals, including the often complex exercise of choosing the fund best suited to your personal situation.