Don’t chase the best funds

If you ask a seasoned mutual fund investor what the three biggest keys to successful investing are, he or she is bound to say discipline, discipline and discipline. What does that mean, exactly? It means avoiding the temptation to react with the news.

A common behaviour by many new investors is that when they hear on the news that a particular stock or mutual fund is poised to explode, they run to their computers or cell phones and switch over every penny in investments that they have to this new hot stock. While this practice can work some of the time, if it worked all of the time without fail, investing would be a lot easier and everyone would be doing it.

Discipline is the practice of sticking with your advised investment plan, even if a more tempting offer comes along. When you first start to invest, you should have a good idea of your risk profile, your short and long term goals and the amount of money you’re able to invest. You should pick a fund that meets all of those criteria and then settle in for the long haul. The only way to make a lot of money with mutual funds is to trust that they will give you the returns you desire, and stick with it.

There are times, however, when sticking with a fund may not be a good idea. If your fund is haemorrhaging money and has been for months, you may want to switch to a more stable mutual fund. But you can’t switch over your money with every bump and swerve in the market. Not only will fees and taxes eat your principle up, you’ll have no long term plan to help you invest and meet your goals.

The two biggest demons you have to deal with are fear and greed. Both of which are valid human emotions, but both can get in the way of logical, disciplined mutual fund investing. If you can manage both your greed and your fear, you can stay away from the lemming-over-the-cliff mentality that grips so many other investors. Mutual fund investing is one case where you do want to stay the course.

Temptation is a scary thing in all aspects of life. The temptation to run to the smoking hot and fashionable mutual fund of the week is extremely high, so high in fact that many investors take it like a month to a flame. If you don’t want to get burned, avoid the investment tips from your friends and use discipline as your number one investment strategy.