Your expectations run high when you invest in a new fund. You have probably picked one with a five star rating, the manager looks brilliant, and the fund’s firm appears to have a solid strategy and good research. Despite your hard work, no fund will deliver outstanding performance forever. Returns may fall behind, the manager’s style might fall out of favor with current market trends, the manager might leave, or there could be a world crisis that drives you to transfer all your money to insured bank CDs. The ability to ascertain which of these problems should trigger a sale and a corresponding investment into a new fund separates the successful investor from those who fall short of their objectives.

We have identified eight common fund investing mistakes, which include those that cause fund investors to sell too early and those that keep them holding on to fund investments too long.

Mistake #1 - Chasing outstanding short-term returns
It is easy to look at outstanding short-term performance and project it into the future (despite the commonly ignored caveat that "past performance is no guarantee of future investment results"). Many funds go through periods of outstanding performance, especially when the manager’s style is temporarily in sync with the market. The risk is investing in a short-term phenomenon. Focus instead on fundamentals such as investment strategy, long-term performance, management style, and management. Do this with practiced discipline to avoid "short-term thinking" mistakes.

Mistake #2 - Overreacting to poor short-term returns
Knee-jerk reactions to lousy short-term performance are common, and they are a big mistake. All funds go through periods of poor performance, especially when the manager’s style isn’t in sync with the market. Some investors will even sell when a fund is outperforming its peers but underperforming market indices. The risk is selling near a market bottom. Ignore short-term performance and focus instead on fundamentals such as those listed under "Mistake #1" above.

Mistake #3 - Failing to follow a disciplined approach
Selling too quickly or holding too long often comes down to inadequate research, misinterpreting the data, or simply letting emotions drive your investment decisions. Emotions are the enemy of sound investing, yet in our practice we see clients succumb to them time and again. The best way to negate "shoot from the hip" emotion is to follow a disciplined approach, even when you are busy and on vacation. If you develop a disciplined strategy, you should know why you own every investment. A key to success is staying current (for self-managed accounts at least weekly and preferably daily) with your portfolio so that you know what is going on and can address problems before they sap returns and cost you money. If you don’t have an investment manager who can do the job for you, you must regularly invest time to research and track your portfolio. Failure to invest your time in research can cost you thousands of dollars each year. If you can’t make the time investment, an investment manager’s fees may pale by comparison to money you lose by investing in a poorly managed portfolio, one that could have performed better.

Mistake #4 - Opportunity cost: waiting to break even
Though it does not make sense, many investors have a hard time cutting their losses in a poorly performing investment, even in the face of more attractive alternatives. Think in terms of "opportunity cost"—what you could be making elsewhere. Why should you hold a fund if there is another in the same category with better potential future performance or better current risk-adjusted performance? Regardless of your initial cost, only stay in funds that are expected to deliver better expected risk-adjusted returns.

Mistake #5 - Trend riding too long
You must know when to get off the bus. This takes study and discipline, and isn't as simple as it might seem. A common mistake in this area is reacting to macroeconomic or secular trends that are already priced into the market. Unless you are well connected and have a staff of researchers, odds are that traders and big investors learned about big macroeconomic news long before you did. Yet many investors make investment decisions assuming such

news is not priced into the market. If the market has already reacted to rising interest rates and increased economic growth, for example, selling a bond fund may only make sense if you believe the economy will grow faster and rates will rise more than the experts think they will.

Mistake #6 - Failing to regularly rebalance
It may be tempting to hang on to your star funds, but that is precisely how investors ended up with way too much in Janus before the 2000 bubble burst. Rebalancing to your predetermined asset allocation levels means you will reduce your exposure in funds with big gains—buying high and selling low. If you had followed a disciplined strategy and rebalanced your well-diversified portfolio at the end of 1999, you would have sold a sizeable portion of your growth and technology-weighted funds. Failing to rebalance with a disciplined approach proliferates unnecessary risk in your portfolio.

Mistake #7 - Ignoring management firm problems
Too many investors hold on to a fund because they either did not notice some problem or because they rationalized a new case for continuing to hold the fund. This is a common but serious mistake. If you bought into the fund because you liked the manager, you should almost always sell when she leaves. Only if a great replacement is named should you consider continuing to hold the fund. General management problems at the firm are a very good reason to get out. If key analysts leave or the firm faces a serious lawsuit or other organizational shakeup, the quality of the firm’s investment management is likely to slip.

Mistake #8 - Relying on a fund’s underlying holdings
This is probably the least common mistake we see, but it still deserves an honorable mention. Don’t sell a fund because one of its top holdings looks particularly attractive or particularly unattractive. If you think the stock of XYZ Corp is overpriced after a huge rally and you notice it in one of your funds’ portfolios, this doesn’t necessarily mean you should sell the fund’s shares. The data you are using to make this decision could easily be eight months old and the manager may have sold those XYZ shares months ago.