Nine Timeless Rules for Investing in Mutual Funds (and ETFs)
by John Markese
It is surprising how seductive any article can be that proposes some arbitrary number of rules for doing something you are even remotely interested in. So please excuse my use of this artifice because if you invest in mutual funds or exchange-traded funds, or are contemplating investing in them—I desperately want you to pore over these rules.
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Rule #1: Understand what the fund invests in and the fund’s investment approach before you invest.
Sounds like common sense and simple, but not enough investors take the time to review a prospectus and an annual report.
First, read carefully the investment objective of the fund:
- Will the fund pursue growth in capital, emphasize income, or use a combined approach?
- Will the investment emphasis be on domestic or international stocks, or some combination?
- Will the fund be broadly diversified—in the case of a stock fund, covering diverse industries and stock size categories (large-cap, mid-cap, small-cap)—or will it be concentrated in a few industries?
- Will the manager be effectively fully invested at all times, or will some form of market timing be employed?
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Discussion
All sensible rules especially the one about "timing " the market. Thank you.
posted over 2 years ago by Robt from Michigan
Re Rule #9:
I find it interesting that market timing is a no-no in this article, while just above, M. Kahn advocates technical analysis monitoring as an industry-wide practice for buy-sell decisions.
posted over 2 years ago by Ed from Texas
I agree with Ed from Texas and I agree with the Kahn article. Almost any "system" will make money in a Bull Market. But Technical Analysis, if used properly, will keep you from LOSING money in a Bear Market. It kept me out of the 2008 Bear Market. So I still have my retirement money. If I had used a "Buy and Hold" approach, I would REALLY be hurting now.
posted over 2 years ago by James from Louisiana
I owe my thanks to the AAII February 2009 magazine article to stay put and not sell. This WAS A "GUT" WRENTHING process but I had a well diversified portfolio and as a result my portfolio is now up over 100% from it's low.
posted about 1 year ago by Richard from Florida
every now and then I get the urge to chase performance usually in a sector fund. Usually I remember results of the last time I tried that and resist the urge. It has occassionally worked on different bond funds but seldom on stock funds.
posted about 1 year ago by Elwyn from Louisiana
As an engineer with lots of digital processing experience, I have a difficult time believing that technical analysis is anything but voodoo. Sorry!
posted about 1 year ago by Jay from Colorado
Selling when everyone is buying madly and buying when everyone is selling madly is "timing the market".
So in rule #9, paragraph #4 the author is contradicting himself.
posted about 1 year ago by Jay from Arizona
The Author states under #2 above "Risk by definition is variation in return over time." This is incorrect. This is the definition of volatility NOT risk. To almost every investor out there risk has to do with one's portfolio losing value, not volatility. Volatility when prices are going up is good. Volatility when prices are going down is bad. Gerald Appel ("Opportunity Investing" and other books) uses DrawDown as a risk measure, and normally uses maximum drawdown. Drawdown is directly related to portfolio loss and can give a gauge for portfolio risk.
Regarding timing the market, the Federal Reserve has published a research paper (as have other academics) that proves that market timing is not perfect, however it can be used to avoid large lasses and let your profits run. The reference for one of the Federal Reserve research papers is "MARKET-TIMING STRATEGIES THAT WORKED", Pu Shen, MAY 2002; RWP 02-01, Research Division, Federal Reserve Bank of Kansas City. We are NOT talking about day trading, rather we are talking catching longer term trends both up (to be in the market) and down (when we want to be out of the market.)
Claiming that market timing does not work is inaccurate and a dis-service to AAII membership. It is true that sometimes there are false signals and that we must proactively reverse our-self when they occur. (These are normally referred to as whip-saws.) What is true is that very few people have the knowledge and discipline to do it correctly and consistently.
posted about 1 year ago by Richard from California
