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3 Investment Pitfalls to Avoid

3 Investment Pitfalls to Avoid
By Ron DeLegge, Editor
July 15, 2009

SAN DIEGO (ETFguide.com) – Investors are their own worst enemies. But before most of them discover it, they’ve already lost the family store. 

Wild swings in the financial markets often match or exceed people’s wild investment decision making.

People overreact, people under react, people are stubborn, irrational and sometimes just downright reckless. Let’s not overlook those that are disorganized, gullible or indecisive. 

Unfortunately, bear markets have a way of amplifying investor’s mistakes. During bull markets fools sometimes prosper. During bear markets fools are completely exposed.

Let’s examine a few common mis-steps and how you can avoid them.

Chasing the Wind
Kenneth Heebner’s CGM Focus Fund (Nasdaq: CGMFX) has long been a favorite among mutual fund performance chasers. But fund performance and the law of gravity are inseparably linked: What goes up must come down.

Despite being the top U.S. stock fund in 2007, the CGM Focus Fund was nearly cut in half with a 48.2% loss last year. And 2009 hasn’t been much kinder or gentler. Through the market close of July 14th, Heebner’s fund has lost around 10% compared to a 5.64% gain in large cap growth stocks (NYSEArca: IVW).

Does anybody remember the Quaker Strategic Growth Fund (Nasdaq: QUAGX)? Here too, is another highflier that’s fallen back to earth.

The fund and its manager (Manu Daftary) have been relentlessly touted in the financial media along with mutual fund analysts. Yet, unbeknownst to many fund investors, Daftary’s other fund, the Quaker Total Return Fund (Nasdaq: QTRAX) had its name changed to the “Quaker Global Tactical Allocation” after its performance turned sour. 

As a “World Stock Fund”, QTRAX has trailed less expensive index funds tracking foreign stocks (NYSEArca: VEU) and QUAGX has trailed large cap growth benchmarks like the MSCI US Prime Market Growth Index (NYSEArca: VUG) on a year-to-date basis.

Do buying top rated mutual funds lead to superior long-term gains?

So far, obtaining top performance by chasing yesterday’s winners hasn’t worked out, but there’s always next year.

Ignoring Cost
Various investment studies show the most crucial determining factor to the future performance of your money is investment cost. And the translation of what it means to you couldn’t be easier to comprehend: If your portfolio has excessive investment costs with loads, high fee funds, and other corrosive costs, expect market underperformance. Conversely, if you’ve taken deliberate steps to lower the investment costs of your portfolio, expect performance that matches or occasionally beats the market.

One key way to keep your investment costs low is by owning low cost index funds and index ETFs. The cost savings of owning ETFs can be as high as 75% annually compared to investing in corresponding actively managed funds. If you really want cut your expenses, start with your investment portfolio!

Your investment portfolio’s future performance is not determined by what a mutual fund or individual stock has done over the past five, ten or twenty years. Your portfolio’s future performance is not determined by the day-to-day financial news, by what financial experts recommend or by short-term market fluctuations. And finally, your portfolio’s future performance is not determined by what other investors have experienced.

Not Saving Money
It’s next to impossible to talk about investing money if you’re not consistently saving it.

In May, the US government’s measure of consumer savings soared to its highest level in 15 years. Instead of consuming people are now conserving. And isn’t it about time? It shouldn’t take a severe economic recession and a bear market in stocks for us to realize we need to save money.

Even people with high incomes are susceptible to financial catastrophe if they don’t save.

After collecting more than $100 million in earnings, former boxing champion, Mike Tyson was forced into bankruptcy. Despite a stellar career as Johnny Carson’s sidekick, Ed McMahon spent his final days in financial chaos. Having a high income in itself does not guarantee financial success. And poor investment decisions coupled with a lack of savings often lead to economic disaster. 

Having lots of bills or debt is not a good excuse for failing to save. Always pay yourself first, even if it’s a modest sum. People that save and invest almost always do better than those that don’t.

Conclusion
There are many more investment pitfalls than just the three I’ve listed here. Nevertheless, chasing the wind, ignoring investment costs and not saving money are sure fire ways to achieve financial oblivion.

Hopefully, you’ll be smart enough to avoid all three.

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