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Mutual funds, like prescription drugs, can have annoying side effects


You don't need a prescription to buy a mutual fund but, much like a drug, fund investing can have its annoying side effects.

Of course, funds basically come with just one warning - "Past performance is no guarantee of future results" - rather than the long list of symptoms that consumers are warned about with drugs, often a description so long and detailed that a squeamish consumer might prefer death to the unintended consequences of the medicine.

In funds, side effects typically are an offshoot of the types of funds being purchased, or the strategy being followed.

An investor recognizing these symptoms in himself, however, should sense that something is amiss and that a change in funds, strategy or attitude might solve the problem. If your mutual fund investments are giving you any of the following conditions, consider what you might do to feel better about your portfolio:

Restlessness, insomnia, headache and indigestion. (Also increased sweating.)

These typically are the result of investing in funds that - somewhere deep in your gut - give you the willies. They might be too volatile, concentrated in a single industry or country, built on an asset type that tends to run from feast to famine, or in an intriguing-but-scary category like emerging markets.

Your fund portfolio shouldn't be making you nauseous or keeping you up at night. If it is, look at how you might calm things down so that you can rest a little easier.

Decreased investment drive (or difficulty picking another investment).

Many investors say they can stomach risk so long as they don't actually lose any money. When they actually see their shares fall in value - even if it's likely to be just a temporary setback - they lose a lot of their desire to invest, because they question whether they have the skills to make money in funds.

When one or more funds in a portfolio is not a world-beater, that doesn't mean your fund-picking methods are flawed; it may just confirm the idea that even the best selection methods can't deliver big winners all the time.

Temporary rose-colored tint in vision or other vision abnormalities.

There are billions of dollars in mutual funds that can best be described as somewhere between mediocre and dreadful. In many cases, the funds are fallen angels, issues that were good to investors once, but which can't seem to fly any more. When looking at these funds, most experts I know wonder, "What the heck are these investors looking at?"

If you see a good long-term performer where the bulk of the world sees a laggard, fund investing clearly has blurred or altered your vision. Review the charts more carefully and see whether a different picture emerges.

Double vision.

This is a different side effect, one that usually occurs when an investor has success in a fund and wants to diversify, but instead adds only funds that buy similar assets. That keeps the portfolio in the investor's comfort zone, but it minimizes diversification and increases overall risk.

An investor who owns four funds within one fund category is likely to get the performance of an index tracking those assets, while paying higher-than-indexing costs. That's a mistake.

Difficulty concentrating, memory loss.

Most investors buy funds as part of a long-term plan, but have a tough time staying focused and committed to that strategy whenever things get sticky in the short term. If you buy a fund for the long term, don't sell it because the past few months have been disappointing. Losing sight of your goals is dangerous, because it's hard to be a successful investor if you are continually changing from one strategy to the next.

Euphoria, prolonged dizziness.

Sometimes a fund pick goes so right that investors keep piling more and more money into it. This is what happened to many people at the peak of the bull market, when they went overboard on technology believing it would never come down.

As this feeling grows, investors tend to let their portfolio get out of balance. The feeling tends to go away only when the market turns, at which point this becomes more painful than a typical downturn.


The stock market is not waiting for you to invest, so that the bottom can drop out immediately thereafter. Yet many investors are convinced that the market or their funds are out to get them.

Truth is, if you feel like this, you most likely are buying a hot performer, right as the market is changing its mind about the kinds of securities it favors. While hot issues tend to stay warm for a while, they also tend to burn investors on the way down.

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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