What Every Investor Should Know About Mutual Funds
by John Markese
In mutual fund investing there are no immutable laws to guide us, as we have in physics. But then again, it's not professional wrestling either.
Some of what follows distills the collective experience of mutual fund investing; some of it has empirical evidence pointing its way. But most is simply common sense that investors often set aside or forget in the heat of making an investment decision.
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Top Performance Lists Are Dangerous.
Probably the single most potentially dangerous action a mutual fund investor can take is to glance at these ubiquitous lists. Funds make the top of the lists not because they are like all the rest of the funds, but because they are decidedly different in some important way. Risk is usually the first important difference. For stock funds, holding stocks that are more volatile than the average stock, holding fewer stocks, or concentrating on only a few industries, raises risk and puts a fund in position to have a greater chance at making the top of the list.
As an example, take sector funds. You can't beat the market by holding it, which is why you can always find a sector fund of one kind or another at the top of most performance lists. Call it stock picking, or industry weighting, or both, but the net effect is increased risk, and less diversification than the overall stock market.
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