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13 Simple Rules for Better Investing

From being patient to focusing on a fund's management, we look at some guidelines for smart investing

Russel Kinnel 28 November, 2017 | 11:43AM

Smiley face on a whiteboard

The fund industry has grown massively in the last 25 years, and it has changed to a better-run, more professional, and lower-cost business, Here are some key lessons for investors:

1) Build a plan for multiple investment goals and stick to it.

2) Align your investments with each goal.

3) Keep costs low, but evaluate whether some services like paying for financial or tax advice are worth the price if you don’t have the time or investing acumen to do it yourself.

4) Choose funds that are good bets for five years from now because they have depth of managers and analysts, low costs, and strong stew­ardship to keep them on the right path.

5) When monitoring funds, pay more attention to management – the manager, the analysts, and the fund company behind them – and costs than changes in performance.

6) Build from the core out. Make sure most of your money and attention goes to core equity and fixed-income funds. It’s easy to get excited by hot performers and exciting niche funds, but a whole portfolio of those funds is just a giant mess.

7) Be open to passive and active investing.

8) Be patient. Even the best managers will underper­form in a three-year period. If the management and strategy are still strong, keep the faith.

9) Do not let the news drive your investments. Markets price in the news probably before you’ve even heard it. Even the smartest investors have difficulty making money by predicting economic trends or choosing which countries will be winners. With hindsight, we can see that the low point for the US economy was the best time to buy in, even though it felt like the worst. The relationship between economics and the stock market is not as clear as most people think.

10) Don’t let the price you paid for an investment drive your decision on whether to sell. I’m amazed when people tell me they are going to hold on to a losing investment until they get back to even. If it’s a bad investment, move on. Think instead about returns. If you think one fund will return 5% a year and one in the same category will return 10%, it doesn’t make sense to wait before switching to the 10%.

11) Don’t worry about a fund’s net asset value as it’s not a good indicator of total return. Funds make distributions along the way that reduce NAV.

12) Invest automatically through a monthly savings plan you set up yourself. The results are great because they enforce a discipline that keeps emotion out.

13) Don’t underestimate the importance of costs.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Russel Kinnel  is Morningstar's director of fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping US investors build winning portfolios.