…can consistently beat a simple buy-and-hold strategy. So, sell your mutual funds only when you believe that a major shift in the market is coming; when a fund's performance has deteriorated to an unacceptable degree; or when your life circumstances warrant it (for example, you're about to close on a house and need the cash for a down payment).

Don't Pay Sky-High Sales Loads or Excessive Fees.

Front-end sales charges will put a serious dent in your long-term returns. Insist on buying no-load funds, preferably from fund families that charge lower ongoing fees than the industry median (which usually hovers around 1.47% a year for stock funds, and 0.99% for bond funds). Many of the large fund families like T.Rowe Price and Fidelity have made a determined effort to curb their expenses. But without a doubt, the low-cost leader is the Vanguard Group.

To get the inside edge on Vanguard funds and the managers that run them, you'll want to read, "Fear, Fodder, Facts and Financials."

Do Keep a Keen Eye on Risk and Reward.

One thing that has irritated me over the years about mutual fund advertising is that they tout past performance, but never tell you how much risk they really took to achieve those rewards. Now, keep in mind that there's no perfect measure of risk. I've found that an old maxim usually applies: "Live by the sword, die by the sword." Therefore, funds that rack up extreme gains in bull markets also tend to lose their shirts (and yours) in bear markets.

Hence, you can, more often than not, form a reasonably accurate picture of a fund's risk by looking at what statisticians call standard deviation–a common measure of volatility. Typically, I prefer funds that have generated higher returns than their peers over the past three to five years, with the same or a lower standard deviation (a.k.a. less risk). To find the standard deviation figures for most funds, visit Yahoo Finance and click the Risk link to the left of the fund quote.

Do Buy Funds When They're Beaten Down.

Over and over, research has shown that the average fund investor captures only a fraction of the profits earned by the funds he or she invests in. How is this remotely possible?

Lured by seductive performance advertising, investors tend to buy heavily after a fund has enjoyed a long, powerful run. It's called missing the boat. Then, when the fund stubs its toe, the same investors bail out—inevitably, close to the bottom. To break the cycle, investors must train themselves to ignore the hype and buy on the dips (and the deeper the dip, the better!)

Follow this simple golden rule (we all love those, don't we?): Wait for a fund's share price to drop 5% from its annual peak before you take the plunge, and you'll outperform the vast majority of investors over the long haul.

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