The Lessons of Fickle Mutual Fund Investors

What can fickle mutual-fund investors teach you?

Discipline generally pays

Because emotions and hype can get in the way of smart investing, systematic dollar-cost averaging—investing smaller sums on a preset schedule—is a sound strategy. Granted, investing a lump sum in the market as soon as you have the cash can be a good approach when the markets just keep going up, or when you are certain you won't give in to the temptation to buy or sell at the wrong time. But in many cases, the dollar-cost average is going to beat the performance chaser.

Don't try to navigate a minefield

Discipline is particularly important in riskier areas, in which the hope for big gains and the reality of big losses can tempt even well-meaning investors into making trading blunders. If you invest in volatile, aggressive funds such as high-growth, sector-specific, or region-specific offerings, promise yourself you won't back out when returns head south. If the manager and strategy that you originally bought are still there, you should be too.

Don't chase funds

Of course, even levelheaded, systematic investors need to alter their portfolios from time to time. When moving money or picking new funds, resist the temptation to chase performance. If anything, consider investing in areas everyone else is ignoring. A regular rebalancing program, whereby you add to holdings that have underperformed and scale back on your biggest winners, can also help you avoid the pitfall of poor timing.