Top 10 Mutual Fund Investor Mistakes:

The most common missteps investors make when building a mutual fund portfolio-and how to avoid them.

1. Paying too much attention to past performance. Taken at face value, a fund's performance can be misleading because it is difficult to know whether the performance is a result of real skill or randomness.
2. Paying too much in expenses. Although costs may seem insignificant when they are expressed as a fractional percentage of the total value of a fund, over time a seemingly small difference in expenses can have a big effect on your retirement nest egg.
3. Not knowing who is managing your money. Be wary of investing in a fund with a novice manager and stay apprised of managerial changes. With a new manager, past peformance is no indication of the new manager's stock picking abilities.
4. Betting on a drifter. A drifter is a manager who invests outside of his benchmark which can upset your entire asset allocation.
5. Buying a fund outside of its sweet spot. Avoiding funds with either small asset bases ($20 million) or too large.
6. Allocating too much of your portfolio to focused funds. Focused funds are subject to far greater volatility. So, when parts of the market like gold, energy and emerging markets seem to be trending strongly upward, it's certainly tempting to put too much money into recent winners with the hopes that the gains will last.
7. Failing to diversify properly. Your best approach is to view your portfolio from the perspective of asset allocation.
8. Holding too many funds. Keep it simple. Seek out the best-in-class funds to follow your asset allocation. Start off with evaluating which funds from your core holdings and then begin to allocate your portfolio with funds and/or ETFs that fill a particular need.
9. Investing for tax avoidance. Your first consideration should be to make sound investement choices.
10. Not having a firm policy on when to sell. Keep an eye on how the fund is peforming against its peers and its stated benchmark. Sell laggards.

According to Fidelity: “The key to long-term success can lie in a diversified portfolio - neither all stock funds, which may pose too much bear market risk, nor all bond funds and cash, which provide little potential for growth. Too often, the fear of being caught in a down market causes some investors to err on the side of caution - and they end up reducing their stock holdings.”

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