So, what is it that fund investors should not do?
1) Don’t buy into a fund after extreme positive performance: Abnormally strong performance on the upside is highly unlikely to persist, investing after a spell of stellar returns is a horribly asymmetric bet.
2) Don’t be concentrated by fund, manager, style or asset manager: Concentration is the surest path to severe losses, it implies we know far more about the future than we actually do.
3) Don’t predict short-term market movements: We cannot predict the short-term behaviour of markets or funds that invest in them. We should not make decisions that suggest that we do.
4) Don’t check short-term fund performance: Short-term fund performance is typically nothing more than random noise, checking it frequently encourages poor decisions.
5) Don’t use performance screens: Given that strong fund performance tends to mean revert, it is hard to think of a worse way of filtering a universe of candidate funds than by ranking on the strength of historic returns.
6) Don’t keep selling underperforming funds to buy outperforming funds: A common behavioural trait which feels good at the time we do it, but compounds into a pernicious tax.
7) Don’t buy thematic funds based on strong backtests: If a fund is being launched based on an in-vogue theme with a stellar backtest the chances are we are already too late.
8) Don’t invest in active managers if we cannot bear long spells of poor performance: Even skilful active managers will underperform for long periods, if that is unpalatable invest in index funds.
9) Don’t invest in funds if you don’t understand how they make money: Investing in things we don’t understand is a recipe for disaster.
10) Don’t persist with an active manager when they start doing something different: A circle of competence for a manager is usually incredibly narrow, if they are venturing outside of this we should avoid them.
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