Financial Literacy - Financial tuneup
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investing
Top 10 investing blunders

Next, make sure you're comparing apples to apples.

Some funds don't make as much money as others -- by design. A bond fund cannot compete with a stock fund because of the nature of their respective holdings. However, different types of funds serve different purposes. The bond fund can have a stabilizing effect on one's portfolio.

"For example," MarksJarvis says, "someone might have a bond fund that perhaps an adviser put them in because that's supposed to be the safe part of their money. And they'll look at it and they'll say, 'Well, I'm only making 4 percent in that fund and I have this stock fund that's up 12 percent. Why not go with the 12 percent?'

"Well, there's a perfectly good reason," she says. "That 12 percent money is not going to be as safe."

Determine your asset allocation strategy.

6. Misreading the label

You bought a bunch of different funds -- so that means you're diversified, right? Not necessarily.

You don't want to find out that you're overexposed to a particular market sector after it hits a rough patch. Luckily, staying out of this trap is a matter of learning to read the label.

"One of the typical mistakes that people make is they get a list of mutual funds from their employer and they can't tell the difference between them. They don't know the vocabulary," says MarksJarvis.

Expand your vocabulary by a dozen words and increase your assets: Check out Bankrate's investing glossary.

Understanding the different types of asset classes will help you strategize (see Tip No. 5). Different asset classes do better at different times. Bonds may do well while the stock market is suffering and large-cap firms may weather tough times better than spunkier small caps. Boring bonds will never match stocks in a hot market and small caps may be better poised to take off like a shot than their larger, lumbering counterparts.

7. Neglecting research

Psssst. Wanna hear a good stock tip?

No, we're not going to tell you about the next Google. We're going to tell you to do your homework.

Researching funds
What to look for
  • Type of fund (large-cap growth, small-cap value, etc.)
  • How long the manager has been there
  • How much the fund costs (expense ratio)
  • Minimum investment required
  • Portfolio holdings (list of securities)
  • Performance information -- remember, past performance does not guarantee future return.

Where to look
  • Morningstar, an independent investment research and ranking site, offers a wealth of free information about mutual funds. Look beyond the star rating, though.
  • Ask for the prospectus from the fund company or brokerage firm. This information is often available online.
  • Get a copy of the most recent semiannual report (again, you'll likely find it online). These reports frequently feature a letter from the portfolio manager. His or her discussion of the past six months will give you an indication of how he or she runs the fund. A good manager discusses both victories and mistakes.

"When making investments, look to invest in the company and not the stock," says Shashin Shah, CFA, CFP with SGS Wealth Management in Dallas. "Research the company," he says. "Look at the Internet, anywhere from MSN to Yahoo Finance; purchase research reports. If you're investing $1,000, you might want to spend $5 to read a research report. Get information from the broker and how they made the picks. Order the company report."

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Similar advice applies when you research mutual funds. Sometimes the fund name can be misleading, so you can't judge by that.

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