Common Sense: You Can’t See It or Touch It, But It’s a Great Investing Tool

Common SenseFund investors have dozens of tools to choose from to help them make smart mutual fund investment choices. Fund databases, websites, calculators, screening software, newsletters, videos, publications, message boards, and financial media are readily available.

For many individuals, the investing process is a bit of a mystery, and they are intimidated by a perceived information-overload. The identification, selection, and monitoring of good quality investment choices are viewed as difficult, complicated tasks. Of course, the Wall Street crowd, with some exceptions, does little to dissuade them of this view so as to reinforce its reputation as the knowledgeable experts in this business.

Investing in mutual funds is not rocket science. It is within the reach of most individuals. However, there are certain principles and basic fundamentals that must be learned and practiced to be a successful fund investor.

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. Playwright and essayist, George Bernard Shaw, said that “Common sense is instinct. Enough of it is genius.”

A dictionary definition of common sense reads like this, “… sound and prudent judgment on a simple perception of the situation or facts.” Accordingly, I’ve put together a few common sense items and their mutual fund investing counterparts:

“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. The absence of these items adds to a fund investor’s return.

“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. But,   investing means taking some degree of risk. 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, as a fund investor, you have been introduced to an opportunity to invest in a given fund 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.” Take your time and make an analytical, left-brain sided decision as opposed to reacting with a quick response based more on emotion than on investment fundamentals.

“Ignorance is bliss.”

Living in a world in which we are constantly bombarded with an avalanche of news and information that is impossible to process, hitting the “off-switch” is tempting. However, when it comes to investing, “not knowing” is not an option; it’s a recipe for disaster. 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.

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.

Richard Loth is the founder and publisher of the Fund Investor’s Schoolhouse, a mutual fund investing educational platform for individual investors.

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