10/06/2000

The Top Five Mistakes

Making money in the market got harder this year. No longer can one just pick any old growth or tech fund and make significant gains in the market. For many, it means the funds you have favored over the last several years may not look so hot any more. The question, at this point in time, is to either hold on or to start looking for greener pastures. This is not an easy question to answer. Whether you choose to hold, or to look for better funds, it is wise to not repeat common mistakes investors make in selecting mutual funds.

In this article, I will give the "top five" mistakes. This list could be longer, but recognizing each of these points is a good place to start. In recognizing some of these mistakes, it should help you make current decisions about your stable of funds and in selecting new ones.

The survey says:

Mistake Number 5 - Buying a Name

Many people are interested in investing in funds managed by Fidelity or Vanguard, for example. When asked why, it is because they hear the name all the time and believe that these firms offer the best funds. These two companies and others that have big name recognition offer some very good funds, but big name funds do not always offer the top and most consistent performers. In a September Investors Business Daily article that lists the top 25 growth funds over the last ten years you do see the name Fidelity, but you also see many names that are not as well known -- MFS, PBHG, AIM, Waddell & Reed, Putnam, etc. Don’t just buy the name.

Mistake Number 4 - Not Knowing What You Are Buying

Often investors believe they have a diversified portfolio of mutual funds, when in fact they do not. They believe they are diversified because they have never looked at the major holdings of their funds. If they did , they would be surprised to find that a majority of their fund holdings are the same. Thus, their "believed to be" well diversified portfolio is nothing of the sort. Make sure you truly have some diversity and have not simply purchased many of the same stocks with a different fund name.

Mistake Number 3 - No Patience

This is a big one just about every year. Investors today expect significant returns and are not always willing to wait out market corrections or swings. For example, I spoke to several people last year who owned health sector funds. They were complaining and wanted to jump out of health and on to the technology ride. Health care took a beating in 1999, however having patience and sticking with the sector was a good move. Health is soaring again in 2000 while the tech sector has declined. It is always wise to think -- long term -- with your investments and often, to exercise patience. If you are in a good sector, with a good fund, and you like the long term prospects, assuming you are a long-term investor, hang in there.

Mistake Number 3 - Not Buying the Manager

What a difference there has been in 1999 returns vs. 2000 returns. However, some fund managers who performed well in 2000 also have their funds with very positive gains in 2000 while others do not. For example, in one fund family I represent, I have been tracking a fund manager for some time. I think he is a great stock picker. His growth fund returned 45 % in 1999. More importantly, his fund is up 22% year to date in 2000! Sure, there were other growth funds that did equally well in 1999, but how many of them are doing as well today. Know your fund’s manager, the good ones know how to make money in different markets.

Mistake Number 2 - Not Knowing How the Fund Stacks Up

I have heard people say things like this -- my fund is doing well; I like my fund, it is a good fund; it had a great return last year. However, in fact, the person may have no idea how his or her funds stacks up against similar funds. For example, I met with a owner of a company last year and we reviewed the funds in the firms 401k plan. He had been happy with the plan. The analysis showed that the majority of his funds, when ranked against funds in the same investment category -- e.g. growth funds, utility funds, -- ranked below average. They had consistently underperformed! If he had been in above average or even just average funds over the same time span his assets (and those of his employees) would have been a great deal larger! Sure, his below average funds looked decent because of the overall strength of the market during the last several years, but they were consistently weak performers.

Mistake Number 1 - Buying Current Performance

And the number one answer/mistake is -- buying performance. Sure, we all have done it. You see that hot fund, the one with the big recent gains, a five star rating and all kinds of ads touting the performance. You buy in and what happens? The fund goes down. Why? Usually, because you have bought the fund at its peak. The stocks it owns or the sector that it is in has been on a good run. The fund company then advertises the great performance. By the time you hear about the fund and purchase it, the fund or the sector have run out of steam and you lose money. As noted financial author Nick Murray wrote -- "don’t buy the record, be the record." That often means going against the mainstream and picking what will be hot, not simply jumping into what was hot. Don’t buy performance.

I certainly could have addressed other issues, like focusing too much on annual average returns and not year-on-year performance, ignoring costs, etc. However, if you start by avoiding these common mistakes, you will do a better job of picking funds and making money.

Please send questions or comments to dcoffin46333@wradvisors.com.