Keeping the Big Picture

Fix your finances first. Before you invest in mutual funds, look at your overall financial situation, set goals, and take advantage of other good investments, such as paying off high-cost consumer debt and using your employers tax-deductible retirement savings plan.

Dont underestimate the power of saving and regular investing. These habits are far more important, valuable, and achievable than your ability to choose tomorrows top mutual fund performers.

If you need assistance with your finances or investment decisions, hire conflict-free advisors. Competent advisors who sell their time and nothing else are far more likely to have your best interests at heart.

Always consider the tax impact of your fund-investing decisions. What matters is the return you get to keep (after tax returns), not your return before paying taxes.

Get your priorities straight. Remember that the size of your fund portfolio has little to do with your overall happiness. Dont forget to “invest” in your health, family, and friends.

Use mutual funds. Funds offer a low-cost method of investing in bonds and stocks, and you get a professional, full-time fund manager on your team. Understand the pros and cons of funds and alternatives (for example, exchange-traded funds, hedge funds, picking your own stocks and bonds) before investing.

Selecting Funds

Dont expect guarantees. You can be logical, analytical, and sensible and still end up with some mediocre funds. Fund selection isnt a science.

Consider the source. You can increase your chances for success by sticking with ethical fund companies that have a history of producing winners with your type of fund.

Pay attention to fees. Avoid funds that charge sales commissions (loads) and have high ongoing operating expenses. You have more than enough commission-free (no-load), low-expense funds with great managers and track records as alternatives.

Beware of buying only past performance. Historic performance is but one of many factors to consider when selecting funds.

*Remember the power of index funds. Index mutual funds, which match and track the performance of a broad bond or stock market index, handily beat the vast majority of actively managed funds.

Diversify. At a minimum, invest some of your long-term money in stock funds, both U.S. and international, as well as bond funds. If your assets allow, use at least two funds within each category.

Give up the guru search. No one can predict which mutual funds will rise and fall the most. If someone has figured out a new sure-win system, theyre not going to share it with you and me.

Dont overestimate the value of finding tomorrows stars. For more than ten years, the best fund managers beat the market averages by a small margin each year.

Monitoring Your Funds and Portfolio

Keep a long-term perspective. Once a month or even twice a year is the most you need to check in and see how your funds are doing. Following your investments too closely may tempt you to make unwise decisions.

Buy when the financial markets are on sale. If youve chosen wisely, dont dump your mutual funds when theyre down. Buy more (or at least keep buying!). Be patient just as when bad weather hits, things get better with time.

Dont try to time the markets. Shifting money around into and out of mutual funds based on the latest news or pundits predictions is almost certain to reduce your investment returns.

Make fund investment decisions that fit with your goals. If your situation significantly changes or your funds performance is much worse than its peers, consider making some changes.

Compare your funds fairly. Evaluate the performance and cost of your mutual funds against funds and indexes that are truly comparable in terms of types of securities they hold.