Tuesday, April 30, 2013

Avoid these common mistakes to really benefit from mutual funds :

Investing in mutual funds is simple.  But, you must have discipline and patience. It is all about commonsense. You just have to hold your mutual funds for long periods. Mutual funds are excellent vehicles for accumulating wealth. They have great potential for creating lasting wealth in the long-term. Yet, people make mistakes in buying and selling them. Remember, most of the times, you lose patience first, before you lose money. But, these mistakes are very much avoidable. Let us see what these mistakes are and how to avoid them. And how you can make mutual funds worth your while!

Buying High and Selling Low.  People have let themselves down frequently by buying high and selling low. Past data shows almost 80% of the mutual funds investments happen after the market has run up and equities are no longer cheap. It leads to disappointment, because, the market either goes down or remains sideways for long periods. Then people get tired of waiting and sell their mutual funds, even at a loss. You can avoid “buying high and selling low” by taking these three simple steps:
  1. By not concentrating all or bulk of your buying in the upper ranges of a bull market,
  2. By holding your mutual funds for long periods through all the ups and downs, and
  3. By refusing to sell your well-chosen mutual funds when the prices are down.
Don’t Chase Top Performing Funds.  It is normal to crave for funds with the best recent performance. You want the fund with the best performance in your portfolio because at the moment of the decision it makes you look good and moreover you are averse to the risk of looking bad in your own eyes and in the eyes of your dear ones. But you must avoid this most common mistake of investing in a fund that has been going up fast, on the assumption that it will keep going up because, past performance is a poor predictor of future returns. Remember, when it comes to top performing schemes, this year’s hero is usually next year’s zero.

Don’t Rush To Sell The Fund That Hurts To Own.  Don’t be anxious to get rid of a mutual fund that is most painful to own. Most funds performance falters because the stocks they own go temporarily out of favour. Remember, it is most likely to be a future bargain. By selling your fund when it is out of favour, you not only lock-in a loss but also lock yourself out of the inevitable recovery, which could be lurking just around the corner. If you are not prepared to stick with a fund through three lean years, then you should not buy it in the first place.

Don’t Lose Patience.  As a mutual funds investor, you must demonstrate an unusual degree of patience. Remember, patience is your single most powerful ally.  You should be willing to wait considerably longer than the typical average individual investor to get a reward. It is extremely rewarding to hold your mutual funds for long periods, say about 10 years or more. The longer the holding period, the greater is the probability that you would gain more per year. Accumulation of wealth is guaranteed when you allow returns to compound over long periods.  The importance of patience in investing can never be over emphasized.  Benjamin Franklin famously said, “He that can have patience can have what he will”.  And even the famous stock market speculator, Jesse Livermore had this to say, “Throughout all my years of investing I have found that big money was never made in the buying or the selling. The big money was always made in the waiting.
Source :  moneylife

No comments:

Popular Posts