Certified Financial Planner John Fawaz (left) appeared Tuesday on Good Morning Tennessee to explain four mistakes that you should try to avoid when investing in mutual funds.-
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KNOXVILLE (WATE) - It isn't difficult to invest in mutual funds. Unfortunately, it is also easy to make simple mistakes that can take a hit on your investments.
Certified Financial Planner John Fawaz appeared Tuesday on Good Morning Tennessee to explain four mistakes that you should try to avoid when investing in mutual funds.
- Chasing Performance - If you only look at historical performance of a fund for the past 5 or 10 years you will not see the whole picture. Fawaz suggests to compare your fund to other funds in the same sector and the index that matches that investment. A fund that went up 10 percent may seem good, but that isn't so great if the market was up 20 percent. You want to do better than the market when it is up and lose less than the market when it is down.
- Fees - Most people don't really know the cost of investment they have. That is because fees are usually hidden in the prospectus. High fees can eat up your return.
- Not knowing the underlying securities your mutual funds hold - Fawaz says one of the biggest mistakes he sees people make is investing several different mutual funds without knowing what the underlying securities are. You should check the portfolios of your funds to make sure there isn't too much overlap.
- Taxes - Mutual funds are fine for retirement accounts like 401Ks and IRAs, but they are not the best investments for non-retirement accounts. The reason is the turnover ratio. Mutual fund managers are constantly buying and selling stocks, which causes short term gains and losses. For this reason you may end up paying taxes even when you don't make money. Fawaz says to look for tax efficient mutual funds. If you can afford it you can also invest in individual stocks.
