It’s almost inevitable… whether it was a “hot” mutual fund that was recommended to you by a friend or a stockbroker, or a mutual fund you purchased after your own extensive research, once you’ve invested you tend to focus on ONE bit of information – the mutual fund NAV.
Is mutual fund NAV the most important information about the mutual funds you own? Or is the net asset value only a small part – a VERY small part – of what you need to know?
It makes sense though, doesn’t it? After all, that’s how you can tell if you’re making money or losing money, right? If the NAV is up, you made a smart decision. If the NAV is down, then your friend, your stockbroker, or your own due diligence is off target somehow.
The truth of the matter is that your mutual fund NAV is one of the LEAST important factors about your investment. There are much more important issues that you need to be aware of – and AVOID – to stay ahead. All too often once an investment has been made it’s as if common sense disappears and blind greed takes over. Yes, greed.
Mutual Fund NAV + Greed and Emotion
Greed is what causes the average investor to hang on to losing investments way too long and causes those same investors to sell their winners way too soon. It’s human nature to want to avoid losses… they just hurt too much.
When you see that NAV below what you paid, your emotions tend to almost FORCE you to justify why you should just hold on until you can at least “get even.” Your broker will tell you “The market always comes back… we are ‘buy and hold’ investors” or give you some other pep talk designed to keep you from selling. If you go to your friend that recommended the investment, they’ll tell you the same thing (which they likely heard from their stockbroker!). If you made the choice yourself, you’ll more than likely talk yourself into holding on as well.
This same human nature causes you to sell your winners too soon because you don’t want to LOSE the gains you’ve accumulated… so you sell out at any sign of a downturn in order to “protect” your gains.
And, more than likely, the ONLY thing guiding you at this point is the NAV of the mutual fund! And the NAV guides your decisions regardless of all of the other tools you could have in place to help you.
Three Tools That Will Help
Here are three things to put in place to keep you from relying solely on mutual fund NAV to guide your decisions:
1) Know Your Exit Strategy BEFORE You Buy
When you buy any investment, including a mutual fund, you absolutely MUST have an exit strategy in mind BEFORE you invest. Why? Because if you don’t, you’ll find every reason in the world to “hold on” and not get out of that loser. By only accepting a maximum loss of 25% in any one mutual fund (while letting your winners run), you’ll never see your portfolio wiped out like many people did in the last several years.
2) Periodically Review Your Mutual Fund Holdings
Buy and hold doesn’t work.
Let me repeat: Buy and hold doesn’t work.
It used to work, but it doesn’t work anymore. This means you’ve got to periodically review what you own and review why you own it. If the reasons you bought don’t apply now, then you should sell and sell quick!
3) Keep Your Emotions Out of the Picture
After nearly 20 years working with individual investors I saw one very common trait over and over: People “fell in love” with their investments. They would talk about their stocks or their mutual funds almost like one of the family. It kind of made sense since frequently that stock or mutual fund had been around longer than the kids. But, regardless, owning something a long time doesn’t make it any better. If it doesn’t make sense to buy it now — right now — then there may not be a good reason to KEEP owning it.
The conclusion? Yes, there is more to investing life than your mutual fund NAV.