Managed fund investing makes sense for an awful lot of people. It's simple. There are, however, rules to follow to reduce risks and enhance your returns.
I've combined some of my personal rules with others garnered by Googling. They're commonsense for experienced investors.
Having said that, plenty of DIY investors seem to suffer temporary amnesia on this stuff from time to time:
Start small and build up.
If you're a new investor then never start by buying one huge chunk in a managed fund. Start small and then monitor your investment until you're confident to buy more. Some funds allow you to buy small numbers of units regularly. This goes hand-in-hand with the theory of dollar cost averaging, which some investors swear by.
Even if one fund has 50 investments, you still need to buy a few to reduce risks. Every year there are stories trotted out in the media of people who put all their money into one investment and lose big time.
Have long horizons.
Investors need to rebalance their portfolios from time to time and may wish to buy or sell a particular investment. But for the majority the best thing to do is sit and watch. Daily ups and downs and even explosive ones like in the credit crunch shouldn't worry you overly. Providing your investments are fundamentally sound they'll bounce back. "Losses" don't matter until you crystallise them by selling. Long term performance is what matters. You might even want to ignore the one or two year returns on your funds. They can derail your decision making.
Don't buy last year's winners.
It's a hackneyed line, but past performance is no guarantee of future performance. A manager could have moved on, or the existing one could, dare I suggest it, make mistakes.
Balance the fund costs with returns.
Some investors will only buy low cost funds. Others argue that it's the fund manager that matters. If you choose a good one and the return is greater than that of a low-cost fund it may be worth paying more in fees. Beware, however, that some real dogs of funds still have high fees.
Consider your tax position.
If you're on either if the higher rates of tax (33% and 30% from October 2010) then you may want to restrict the pool of managed funds you choose between to Portfolio Investment Entity (Pie) funds. That's funds that tax you at 28% from October, instead of at your marginal rate.
Beware of newbies.
The Huljich Wealth Management debacle with Kiwisaver is a great example of why you should beware of newbies. The owner Peter Huljich admitted publicly that he'd depositing his own money into the fund to offset losses, making the returns look better to potential investors than they were. Research your managed fund house and ensure it has a track record. But just because you haven't heard of the name, however, it doesn't mean it's a newbie. For example Tyndall has a low profile but it is one of New Zealand's biggest investment managers. The reason you may not have heard of it, is that until it launched on RaboPlus, individual investors couldn't invest – unless it was through a Kiwisaver.
What are your investing rules?