Top 3 Biggest Mistakes With Investing in Mutual Funds

Avoid These 3 Common Mistakes and You'll Have Better Investing Success

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Avoid these 3 common investing mistakes with mutual funds. Getty Images

When investing in mutual funds, or any type of investment security for that matter, picking the best investments is not always as important or as critical to success as avoiding the worst of mistakes.

Here's a quick list of links to the biggest and most common investing mistakes with mutual funds:

  • Ignoring or Not Understanding Your Risk Tolerance: One of the most damaging things an mutual fund investor can do to their portfolio is to sell funds when they have declined significantly in value. The most common cause of selling at market lows is not understanding one's own tolerance for risk prior to buying mutual funds. For example, if you are a beginning investor and you buy your first mutual fund when the market is at a high point, you might not know how you will react when the inevitable bear market hits and your mutual fund declines in value. Will you panic and sell your fund? If so, or if you're not sure, you may need to choose funds more suitable for you.
  • Failing to Diversify: Similar to the mistake with risk tolerance, failing to properly spread investment assets among different mutual fund types can unnecessarily create excessive risk by investing too heavily in one narrow market segment. And when that particular area of the market gets hit with steep losses, the investor may abandon their investment objective and sell the fund or funds hastily. Investors should keep in mind that investing in several funds does not insure proper diversification if those funds have similar objectives. See this article on overlap for a deeper understanding.
  • Paying Too Much In Fees and Expenses: If you are a do-it-yourself investor, there is no good reason to buy funds with loads, transaction fees, or high expense ratios. The way to avoid these errors is to invest with one of the best no-load mutual fund companies, look for no-transaction fee (NTF) funds, and be sure to look for below-average expense ratios. You can also keep costs down by minimizing your trading frequency. Many investors find success in keeping all these costs down by building lazy portfolios.

    Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.