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What You Should Know About Investing in a Mutual Fund

Want to know what I believe is the most important fact about investing in a mutual fund?

Most investors show much lower real-life returns than the performance numbers posted by the fund they’ve invested in.

Maybe you think mutual funds lie about their performance. Or maybe you think the disparity is because funds charge investors fees (Well, of course, they do, but fund tracking businesses such as Morningstar deduct those fees from their report on a fund’s performance).

Nope, the biggest reason that fund investors don’t do as well as the reported returns of the funds they invest in is because of investors themselves.

Academic research has shown that fund investors chase performance.

That is, they buy a hot fund after it’s been hot for long enough to hit the financial press or to show up in the ratings. Sometimes that means they buy just as that hot fund is about to cool down.

And investors will dump an underperforming fund just because it’s underperforming. Sometimes that means they sell just as a cool fund is about to get warmer.

In other words, investors in mutual funds do what investors in stocks do all too frequently: They buy high and sell low.

How do you avoid that?

It’s actually pretty simple. Before you invest in any fund, including the Jubak Global Equity Fund, you should have a strategy for that fund and a plan for how it fits into your portfolio.

Let’s say you buy a fund that focuses on commodities such as oil, copper, and iron ore. Do you own that fund to help you create a diversified portfolio? In that case you hold onto the fund during all of its ups and downs because of the way it fits into the construction of your portfolio. Or do you own it as a contrarian play on this cyclical sector, a way to make big, relatively short-term gains as the commodity cycle moves from bottom to top? In that case you want to buy this fund when everybody hates commodities and performance has been terrible, and you want to sell it when everybody loves commodities and performance has been wonderful.

So what’s your strategy for the Jubak Global Equity Fund?

I’d suggest that this is a fund that you could use as a core of your portfolio to give you balance between U.S. and overseas stocks, and to give a bond-heavy portfolio exposure to equities.

The trend that the Fund is built around—the relative outperformance of developing economies and therefore the outperformance of emerging market stocks—is a relatively long-term trend. I think it will play out over the course not of quarters but of a decade or more. My belief is that you won’t need to trade in and out of this Fund; in fact, if all is going as I expect, you should probably think of buying more shares when it’s cheaper.

That’s not to say that emerging market stocks don’t run through cycles of popularity and unpopularity. You should, in fact, try to avoid buying them when they’re most loved by the most investors.

But if you want to play that popularity as it waxes and wanes I think there are better, more concentrated vehicles that are easier to trade; ETFs (Exchange Traded Funds) for example.

This all assumes that the Jubak Global Equity Fund works as described and invests in what it promises to invest in. Track my buys and sell and the allocation of the portfolio to make sure that I do the job I’ve promised to do.

If not, that’s a good reason to dump my Fund.

Short-term changes in performance or popularity aren’t.