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ECONOMY | 05.28.2024

Seven common errors when investing in funds and how to avoid them

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Investing in funds can be a solid strategy for those who seek to diversify their portfolios and obtain returns. However, as in any form of investment, there are common errors that may negatively affect your financial results. Identifying and avoiding these errors is essential to maximize your opportunities for success.

Below, we show you the most common mistakes that both novice and more experienced investors make and how to avoid them.

1. Not having clear investment goals: Before investing in a fund, it is crucial to define your short-, medium-, and long-term goals, as well as your tolerance to risk. This will help you select the funds that best suit your needs and prevent you from making impulsive decisions. As mentioned in this review of the keys for choosing a mutual fund, knowing your investor profile is essential for making better decisions. What is your tolerance to risk? What financial goals do you want to achieve? How soon do you need to reach them? The questions are always the same and the answers will make you see everything clearer, also when investing in one mutual fund or another.

2. Ignoring fees: Many investors ignore the costs associated with investment funds, such as management fees and operating expenses. Before investing, make sure you understand all the costs involved and look for funds with expenses that are either low or justified by a good track record which speaks positively about the investment vehicle management team. This is important because, when it comes to recovering your investment and achieving maximum net profitability, we must remember to subtract not only the tax side, but also any associated expenses.

3. Failing to diversify: Diversification is key to reducing risk in an investment portfolio by minimizing volatility and helping us to better adapt to the different moments of the economic and market cycle. However, some investors make the mistake of concentrating on a single type of sector or companies due to fear, ignorance, etc. To avoid this error, consider diversifying your portfolio between different types of assets or products that allow you to protect yourself against possible falls. Remember the old saying: “Don’t put all your eggs in one basket.” However, be careful not to overdo it by buying shares in too many different funds: excessive diversification can lead to duplications (having ‘repeated’ exposure to the same companies) and can make monitoring your portfolio more complex.

4. Making emotional decisions: Emotions can cloud your judgment and lead you to make irrational financial decisions. It’s important to remain calm and to follow a sound investment strategy, even when markets are volatile. Avoid getting carried away by fear, euphoria, or greed and maintain a long-term focus. Regular investments, which require you to make one-off income each month or quarter, can be your “best friends.”

5. Neglecting to monitor your investments: Many investors make the mistake of investing in funds and then forgetting them. It’s important to monitor your investments regularly, review their performance, and adjust your portfolio as necessary. The macroeconomic context is crucial, and this is where active management will adapt the fund to the current situation. However, as investors, we can also take advantage of market trends, for example, by moving from one fund to another. This is, in fact, one of the advantages of these products, since you can change your investment destination without having to be accountable to the Tax Office. That’s why it’s important to keep a record of your investments and review your investment objectives regularly.

6. Overlooking the long term: One of the most serious errors when investing in funds is thinking about making money fast. With this goal in mind, it can be tempting to be swayed by a fund’s returns over the past 12 months, rather than considering longer periods (three, five, or ten years) that offer a better understanding of the fund’s consistency. And the long-term works not only by looking back, but also looking at the future: investing in funds requires a long-term perspective, ideally of at least 10 years. The power of compound interest is magnified over time, so it’s essential to maintain patience.

7. Taking advice from non-experts: Relying on unreliable sources or being carried away by trendy investments can be dangerous. It’s crucial to analyze historical data and the long-term consistency of any fund before investing in it. Avoid following recommendations that lack solid foundations and, most importantly, seek professional advice when necessary.

    At MAPFRE, we have a financial advisory unit, MAPFRE Gestión Patrimonial, which helps investors find the options that best suit their objectives and needs. MGP’s customers have access to a platform offering a range of over 15,000 mutual funds from the world’s top asset managers, with the ability to underwrite, transfer, and/or redeem units in a fully dynamic environment. They can also access MAPFRE’s pension plans and savings and retirement products.

    MGP currently has offices in Madrid, Barcelona, Valencia, Bilbao, Seville, Zaragoza, Alicante, Málaga, and Palma de Mallorca.