Why You Shouldn't Chase Investing Trends

Avoid flavor-of-the-month funds.

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On my weekly radio show, listeners have asked "I heard that the dollar is going to fall in value—so is there a falling dollar fund?" Another caller wondered, "Inflation is forecast to rise—is there a rising inflation fund?" The answer is: You don't need to buy these things. The marketing department at an investment company might create a fund that tries to profit from the trend of the moment, but that doesn't mean investors should take the bait. It might sound cool to buy a falling dollar fund. However, that fund won't be so great when the dollar rises.

Rather than try to be an amateur economist, stick with the best mutual fund managers who have proven that they can pick securities that will benefit the most from whatever will happen in the future. These fund managers should have discipline and a methodology to find stocks that will go up during times when dollar is falling. The managers can also determine which companies will benefit when the dollar is rising.

[See Why Mutual Funds Are the Best Investment.]

In fact, the best managers will likely have already invested in the stocks that will benefit from a certain trend many months earlier. Managers and their teams of analysts are armed with proprietary research from throughout the world, as well as access to top company executives, which helps them forecast what's going to happen in the future. The best managers also have access to skilled economists who understand market conditions better than most individuals. In turn, fund managers can stay ahead of the investing crowd and purchase those stocks at attractive prices. By the time most investors notice that the dollar is falling, the stocks that would benefit have already risen.

Chasing investing trends reminds me of those infomercials that tout medical remedies for every kind of ailment imaginable. If your muscles or joints ache, there's a special pill that will relieve the pain—never mind all the harmful side effects. In reality, all you probably need to soothe your muscles is aspirin and rest. Another example is the "new and improved" version of laundry detergent, toothpaste, and popular snacks that consumer product makers try to get us to buy at the supermarket. Do we really need "Doritos 3rd Degree Burn Scorchin' Habanero Flavored" tortilla chips? It's all marketing.

In investing, stick with tried-and-true mutual funds. Yes, it sounds boring, but that's OK. To find the best funds, look for managers who are consistent performers. That means their funds perform well in good markets and not as badly in down markets. These managers have shown that they know economic conditions better than individual investors do. We also like managers who have been running their fund for a long time.

So don't get sucked in by the "new and improved" or trendy fund of the week that some investment company is pushing. Remember, there's no quick fix in investing. In the long run, the best mutual funds can provide you with everything you need to reach your goals.

Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April, 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC registered investment adviser which provides mutual fund and asset allocation recommendations and research to stores in The Mutual Fund Store system.