Sin #1 – Lust
It’s fine to have a favorite mutual fund, but just make sure that your affection for the investment is rooted in reality. Too often, 401k investors will look at past returns or untapped potential as a reason to fall in love with a mutual fund — even when quarterly statements tell a very different story.
Take one of the flagship mutual funds, Fidelity Magellan (MUTF: FMAGX). From early 2003 to early 2006, investors were rewarded with eye-popping returns of almost 50%, and assets under management were cruising at around $50 billion. The fund was popular and highly profitable, and coworkers could pat each other on the back for choosing this great fund that was so good to them.
Except Magellan’s gains in that timeframe essentially track the major indexes. And over the last five years as the bull market has faded, the fund is off 35% while the major indexes are flat. What’s more, for two separate periods in 2009 FMAGX had Morningstar’s worst rating of just one star.
Breaking up is hard to do — but sometimes it’s for the best. Don’t let lust cloud your judgment and erode your 401k’s value.