6 Common Sense Investing Truths

05/16/2013 6:15 am EST

Focus: STRATEGIES

Common sense is obviously crucial to the long-term success of any investor. But this clear advice is heeded far less often than most expect, says Richard Loth of The Fund Investor's Schoolhouse.

Our educational booklet, The Fund Investor's Toolbox, identifies seven practical, easy-to-use mutual fund investing tools. Here, we summarize one of these tools—common sense.

No one would argue that to be a direct investor in stocks, bonds, and other securities takes expertise, experience, and time. In contrast, investing in mutual funds is not rocket science. It is within the reach of most individuals.

Appropriate guidance from an investment professional or a meaningful level of investment self-education can provide an adequate foundation for informed fund investing decisions. Add a solid dose of common sense to this formula and the elements for success are greatly enhanced.

Accordingly, I've put together a list of commonsensical items and their mutual fund investing counterparts that I believe fit nicely into The Fund Investor's Toolbox:

"A penny saved is a penny earned." Mutual fund investors need to be cost conscious. Every penny saved by not having to absorb (1) a sales-charge, (2) higher than average fund operating expenses, and (3) excessive portfolio transaction fees all add to a fund investor's return. And, it is matter of record that low-cost funds, over the long term, outperform higher-cost funds.

"Don't touch a hot stove." Fund advertising and financial media often emphasize what's "hot," i.e., high-octane performers that are portrayed as "must buys." They are promoted as new, and, by implication, better, approaches than the more traditional fund investing options.

Just remember that if it's "hot," you may get "burned," which means you'll stand to lose money.

"To err is human." When it comes to investing, not losing money is generally considered to be an important principle. Minimizing mistakes, both their frequency and magnitude, is as helpful to building an investment nest egg as maximizing your winning picks.

However, investing means taking risk, and losses, both realized and unrealized, are hard to avoid. The goal is to manage investment risk and keep losses within an acceptable range. It's also true that failure is success, if you learn from it.

"Haste makes waste." If you have been introduced to an opportunity to invest in a given fund, industry sector, or market segment that is accompanied by a pitch to "act now," activate your brain's caution button.

Speculators and day-traders can't wait for events to unfold. But as a long-term investor, you need to be "reflective" rather than "reactive." Homework trumps guesswork in the investing process.

"Ignorance is bliss." When it comes to investing, "not knowing" is not an option; it's a recipe for disaster. What is acceptable is tuning out what the investment community refers to as "market noise": the cacophony of financial talk shows, the so-called "breaking news," which, these days, seems to cover all the news, and the dozens of talking-heads on TV's business channels.

Whether you're a do-it-yourselfer or use an investment professional, knowing what you own and why you own it is just smart investing practice.

"Consider the source." Whether its investment information, guidance, or advice, be sure that what you're reading or listening to is unbiased, conflict-of-interest-free, and well-researched.

Be aware that many of today's ubiquitous "contributing writers," whose opinions regularly appear on a host of financial Web sites, have questionable authoritative credentials. Whatever the source, a healthy bit of constructive skepticism would not be out of order.

In summary, just because your fund investing know-how is limited, do not be afraid to ask questions and be persistent in getting answers to those questions. In many cases, you'll find that common sense questions and answers will be a useful tool in your fund investing endeavors.

Read more from The Fund Investor's Schoolhouse here...

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