A Warning for Sports-Loving Fund Investors

It's a glorious time for sports fans. After a close and competitive Super Bowl, the eternal optimism of baseball's spring training has arrived. And in just a few weeks, we'll enjoy the national celebration known as Office-Pool Madness, when basketball fans across America spend their afternoons guessing the fate of Tennessee-Chattanooga and debating the proper pronunciation of Gonzaga.

In many ways, following mutual funds can itself seem like a sport. Investors can check rankings and predictions, and when they make their picks, they try to select funds that will beat their rivals, the indexes, or those picked by the guy next door. Fund companies even have slogans and logos, just like fans' favorite teams. Some even boast their own animal mascots, such as the Dreyfus lion (though, sadly, Montgomery's owl is now out of work). If you're closely following your fund's ups and downs, collecting the fund reports sent right to your door, and reading the letters written by your portfolio manager, it can be tempting to think of yourself as part of the team.

Resist the temptation. That mindset can be counterproductive, even dangerous. For one thing, in sports, winning the title in one particular season is the ultimate goal. Fans will tolerate, or sometimes even applaud, a team's trading away of promising young players if the aging veteran received in return allows them to win just one title. That's because sports are divided into completely separate seasons--every year the record starts over at zero. Investing is the complete opposite. The end of a calendar year or any other arbitrary stretch is meaningless: Investors get no reward if a fund finishes in first place in any particular time period. A short-term title may even serve as an indication that a fund employs a risky strategy that could eventually backfire.

Similarly, with regard to sports, a few spectacular or unusual plays can compensate for a losing effort. Fans who spend the time, effort, and money to see a favorite team in action may be disappointed with a loss but probably still glad they went. After all, there may have been several mind-blowing dunks and a couple of remarkable moves. Maybe a talented rookie dove into the stands after a wayward pass or a favorite player tossed in a miracle shot at the buzzer. All in all, a worthwhile night. By contrast, in fund investing, a few spectacular stock picks--or a great quarter or year--can't possibly compensate for a dismal overall experience.

Another difference gets down to the psychological level. The whole point of being a fan of a team is to become emotionally attached to it. Only if you wrap yourself up in your team's fate can sports do what they do best: help you forget about the worries in your regular life. But taking a similar approach to your funds would be a recipe for disaster. Even if they've provided excellent returns over time and behave themselves fairly well, you should never get emotionally attached to them. While it's not a good idea to shuffle your holdings too frequently, there's absolutely no reason not to switch funds and fund firms if they no longer merit your investment.

Along the same lines, sports teams have an unnatural monopoly. Save for the few two-baseball-team towns--and even there, fans rarely switch from one team to the other--you're stuck with the club playing in your area, for better or for worse. If you're a Denver resident disappointed with the Broncos' performance in the post-John Elway era, what are you going to do? Start cheering for the New England Patriots? Not very likely. On the fund side, instead of monopoly, there is abundance--and it's unlikely that any of the choices will conjure up warm childhood memories.

This point deserves further discussion. After all, some of you probably prefer to support local businesses whenever possible, rather than national chains or huge corporations. In general, there's nothing wrong with that. Just be careful if you extend that habit to mutual funds. For example, from time to time I used to listen to an investing radio program from Milwaukee, and I was struck by how many of the Wisconsin-based callers mentioned that their portfolios contained funds from the Strong or Heartland families based in that state. Given the woes subsequently suffered by both firms, I can't help thinking many of those callers now wish they had instead chosen to send their money to out-of-town teams in Boston, Baltimore, or New York. That may have felt a bit awkward for some folks, but they can demonstrate their home-state allegiance in other ways--that's what the Packers are there for.

That's not to say there are no similarities whatsoever between sports and fund investing. Some do exist--especially when it comes to identifying successful organizations, as my colleague Kunal Kapoor discussed in a column last fall. But by remembering the important distinctions between the two, you're more likely to enjoy success with your portfolio over the long run.