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Nine Timeless Rules for Investing in Mutual Funds (and ETFs)

by John Markese

Nine Timeless Rules For Investing In Mutual Funds (and ETFs) Splash image

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.

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.

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John Markese is the former president of AAII.


Discussion

Robt from Michigan posted over 3 years ago:

All sensible rules especially the one about "timing " the market. Thank you.


Ed from Texas posted over 3 years ago:

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.


James from Louisiana posted over 3 years ago:

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.


Richard from Florida posted over 2 years ago:

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.


Rodney from California posted over 2 years ago:

Great article!


Elwyn from Louisiana posted over 2 years ago:

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.


Jay from Colorado posted over 2 years ago:

As an engineer with lots of digital processing experience, I have a difficult time believing that technical analysis is anything but voodoo. Sorry!


Jay from Arizona posted over 2 years ago:

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.


Richard from California posted over 2 years ago:

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.


Harvey Leviton from Minnesota posted 2 months ago:

I have had great success using the FUNDX market timing approach. Rated by Hulbert as one of the top performers over the last 5,10,20 years. It tells you what no load funds to buy, hold and sell each month based on different levels of risk tolerance. They do all the analytical work using an ipsative metric. You just pay for the subscription, follow their advice and you will make many times over what you paid for the subscription. I don't work for them and I get no benefit if you decide to subscribe. I just think they do great work and would like to pass this information along. Like AAII, it is well worth the money.


Frank Burst from New York posted 2 months ago:

The successful investor can filter information contained in the article above and the comments submitted. I truly enjoy reading the members various opinions then merge what I feel are the facts that will benifit my particular portfolio the most.


Tony from Massachusetts posted 2 months ago:

I have to disagree with the first paragraph of rule #8 and with Rule #9. If you aren't going to look at your funds for months at a time, you could miss a catastrophic happening. Most funds don't exhibit the volatility of stocks, so I have found that at least a weekly glance is warranted. In addition, don't just take a peek - monitoring implies keeping track. For instance, a weekly plot of the NAV for the funds of your interest will indicate trends that you can act on before being unpleasantly surprised. And, once you set this up, it takes minutes to maintain with a tool like Excel.

You can also avail yourself of many online tools that will make your life easier - for instance, AAII and Morningstar. Note that AAII provides quite a broad scope of information and services. Morningstar seems to be an industry-wide source of information.

Market timing is employed successfully by many people. You almost never capture "the" bottom or top, but you do in general make better choices and more profit than one who doesn't do this.

I also have to disagree with Rule #4. If you are truly paying attention to what is happening, Sector Funds are a good investment.

It goes without saying that the rules urging you to pay attention to fundamentals are valid - this requires some reading homework, the separating of fact from fiction, and in general devoting more time than the technical analysis. But again, there are many services such as AAII and Morningstar to help you.

Bottom line: Knowledge is always an advantage. If you don't want to devote the time to analyze - many people have no interest in devoting a block of time for this (and that's OK) - but would rather invest and walk away for extended periods of time, it is probably in your best interest to employ an advisor who will do this for you.

Even if you use an advisor, take a few minutes each day to find out what in general is happening in the markets (just so you don't get blindsided), and remember that there a quite a few services that do the spade work for you as well. Both fundamental and technical information are available to minimize your involvement while maintaining some control over your future. In the end, it's your decision and your money - life is not a free ride.


Tony from Massachusetts posted 2 months ago:

I have to disagree with the first paragraph of rule #8 and with Rule #9. If you aren't going to look at your funds for months at a time, you could miss a catastrophic happening. Most funds don't exhibit the volatility of stocks, so I have found that at least a weekly glance is warranted. In addition, don't just take a peek - monitoring implies keeping track. For instance, a weekly plot of the NAV for the funds of your interest will indicate trends that you can act on before being unpleasantly surprised. And, once you set this up, it takes minutes to maintain with a tool like Excel.

You can also avail yourself of many online tools that will make your life easier - for instance, AAII and Morningstar. Note that AAII provides quite a broad scope of information and services. Morningstar seems to be an industry-wide source of information.

Market timing is employed successfully by many people. You almost never capture "the" bottom or top, but you do in general make better choices and more profit than one who doesn't do this.

I also have to disagree with Rule #4. If you are truly paying attention to what is happening, Sector Funds are a good investment.

It goes without saying that the rules urging you to pay attention to fundamentals are valid - this requires some reading homework, the separating of fact from fiction, and in general devoting more time than the technical analysis. But again, there are many services such as AAII and Morningstar to help you.

Bottom line: Knowledge is always an advantage. If you don't want to devote the time to analyze - many people have no interest in devoting a block of time for this (and that's OK) - but would rather invest and walk away for extended periods of time, it is probably in your best interest to employ an advisor who will do this for you.

Even if you use an advisor, take a few minutes each day to find out what in general is happening in the markets (just so you don't get blindsided), and remember that there a quite a few services that do the spade work for you as well. Both fundamental and technical information are available to minimize your involvement while maintaining some control over your future. In the end, it's your decision and your money - life is not a free ride.


Tony from Massachusetts posted 2 months ago:

I have to disagree with the first paragraph of rule #8 and with Rule #9. If you aren't going to look at your funds for months at a time, you could miss a catastrophic happening. Most funds don't exhibit the volatility of stocks, so I have found that at least a weekly glance is warranted. In addition, don't just take a peek - monitoring implies keeping track. For instance, a weekly plot of the NAV for the funds of your interest will indicate trends that you can act on before being unpleasantly surprised. And, once you set this up, it takes minutes to maintain with a tool like Excel.

You can also avail yourself of many online tools that will make your life easier - for instance, AAII and Morningstar. Note that AAII provides quite a broad scope of information and services. Morningstar seems to be an industry-wide source of information.

Market timing is employed successfully by many people. You almost never capture "the" bottom or top, but you do in general make better choices and more profit than one who doesn't do this.

I also have to disagree with Rule #4. If you are truly paying attention to what is happening, Sector Funds are a good investment.

It goes without saying that the rules urging you to pay attention to fundamentals are valid - this requires some reading homework, the separating of fact from fiction, and in general devoting more time than the technical analysis. But again, there are many services such as AAII and Morningstar to help you.

Bottom line: Knowledge is always an advantage. If you don't want to devote the time to analyze - many people have no interest in devoting a block of time for this (and that's OK) - but would rather invest and walk away for extended periods of time, it is probably in your best interest to employ an advisor who will do this for you.

Even if you use an advisor, take a few minutes each day to find out what in general is happening in the markets (just so you don't get blindsided), and remember that there a quite a few services that do the spade work for you as well. Both fundamental and technical information are available to minimize your involvement while maintaining some control over your future. In the end, it's your decision and your money - life is not a free ride.


Steve CFA, CMT from Michigan posted 2 months ago:

I love the market timing comments..like buying a 8 P/E and selling a 25 P/E, is that not timing?


Jesus Dominguez from Virginia posted about 1 month ago:

I googled "FUNDX market timing approach" and nothing came up with that.


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