If you're like me, you've made plenty of mistakes with your money, and you expect to keep making more of them. (With some discipline, we can hope to keep from making the same mistakes too often, at least.)
Here are a few of my personal top blunders:
- Not investing soon enough. If I'd been plowing money into Wal-Mart (NYSE:WMT) in my 20s instead of letting it pile up modestly in my checking account, I'd be smiling broadly now. In the past 20 years, the stock has enjoyed more than 18-fold returns.
- Trying to time the market. If you know that stocks such as Applied Materials (NASDAQ:AMAT) and Texas Instruments are tied to cyclical industries, such as semiconductors, you might try to jump and out of them at the right times. According to the Semiconductor Industry Association: "From its inception, the semiconductor industry has been cyclical. Cycles typically included two strong years of 20% growth, one year of slow growth, and one year of flat or declining growth." But timing such markets is very hard to do well and consistently -- and even if you do it well, you'll rack up significant commssion costs as you jump in and out of your holdings.
- Investing in what you don't understand. I've done this countless times, such as when I invested in Oracle (NASDAQ:ORCL). I could tell you the ticker symbol and the CEO's name, and that it was somehow involved in databases. But could I explain just how the company made its money, and what its competitive position was? Not at all.
- Buying and selling too often. I haven't done this with the determination or frequency of a daytrader, but I've done it nonetheless. Usually, it's because all my money is tied up in various stocks, and I see a new one that I really want to buy. So I sell shares of Company A to buy shares of Company B; often, if I'd just been more patient, Company A would have rewarded me well.
- Losing sight of price or quality. This is an easy mistake to make. We may read up on a company and be convinced of its greatness -- one example for me is Costco. But it's a mistake to jump and buy at any price. Similarly, if a company's stock price has fallen considerably, so that its P/E ratio is perhaps at near-record-low levels, that doesn't necessarily mean it's a bargain. Homebuilder DR Horton, for example, recently sported a P/E in the mid-single digits. That might look tantalizing, but before you buy, ask yourself whether you think our recent housing boom will continue, or whether it's due for a slowdown.
A solution for us
Given these frequent kinds of mistakes -- and many others -- is there any easy way to avoid many of them? My answer is yes! I've arrived at a solution that is working well for me, and may work well for you, too:
Mutual funds.
In the past few years, I've shifted a lot of my portfolio from stocks into funds. Here are some benefits for me: I can pay less attention to lots of companies. I'm free from feeling like I need to read scores of annual reports. I can leave my money in the hands of smart money managers. There may be lots of compelling companies out there that I don't understand -- but the fund companies' analysts will have a much better handle on those firms and their industries.
In a nutshell, leaving a chunk of my money in some trusted hands means that those dollars won't be subjected to the mistakes I might make with them. By finding some funds with solid track records and great promise and by investing in them, I'm letting the funds save me from myself.
I found the MuhlenkampFund (MUHLX) through our Motley Fool Champion Funds newsletter service. It's averaged gains of 13.6% over the past decade and 11.6% over the past three years. The fund's recent top holdings included UnitedHealth Group (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), Capital One Financial (NYSE:COF), and Altria Group (NYSE:MO).
Focus on the great funds
There are thousands of funds out there, and while most don't even match the overall market's performance, some do outperform the market handily and have done so for a long time, with reasonable fees and no loads. You can find them on your own -- or with our help.
I invite you to take advantage of a free trial of our Champion Funds newsletter service, which recommends top-notch funds such as Muhlenkamp every month, and which has racked up an impressive record. Together, his picks have gained an average of 24% vs. 16% for benchmark indexes. Try the newsletter for free for a month, and you'll be able to access all past issues and picks.
Longtime Fool contributor Selena Maranjian owns shares of Costco, Johnson & Johnson, and the Muhlenkamp Fund. UnitedHealth and Costco are Stock Advisor recommendations. UnitedHealth and Wal-Mart are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. The Motley Fool is Fools writing for Fools.
