Avoid the pitfalls of mutual funds
- Avoid being swayed by flashy predictions about the market.
Don't be fooled by the predictions of pundits that are often wrong.
- Never try to predict the market.
Trying to guess where the market is going will lead you astray. Instead, focus on investing regularly and putting as much money as possible into low-cost, diversified funds.
- Don't rely on the last year or two of a fund's performance.
A fund manager may be able to do well in the short term, but over the long term, they will almost never beat the market. When evaluating a fund, look at its track record for the last ten years or more.
- Don't rely on rare, one-off results.
Don't be fooled by the occasional outlier. Nobody can consistently guess which funds or stocks will outperform, or even match, the market over time.
- Understand the power of compounding.
Compounding is the process of generating earnings from previous earnings. It is important to understand the math of compounding to understand the difference between fees and returns.
- Ask for after-tax, after-fee returns for the last ten, fifteen, and twenty years when considering a broker.
When considering a broker or actively managed fund, ask them for after-tax, after-fee returns for the last ten, fifteen, and twenty years. This will help one understand the performance of the fund.
- Invest in index funds.
Investing in index funds is a better option than actively managed funds as they have lower fees and better returns.
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