Signs That Your Sweet Fund Is About to Turn Sour

Despite the Securities and Exchange Commission's recent crusade to improve mutual fund disclosure, there's still one thing you'll never hear from a fund:

Get out now. Performance is about to collapse.

So much for fair disclosure. However, you can be on the lookout for some telltale signs that a fund is about to falter. Here's a handy checklist of reasons you might want to dump a fund, or at least avoid it.

Overwhelming Popularity

Hot returns might be the ultimate come-on for investors. But a fund's fantastic performance and its resulting popularity are two signs that it's on the verge of stumbling.

Too much money in a particular fund or investment style can kill performance. If everyone is throwing cash into a sector, there's not a lot of room for it to keep going up. As more people take a piece of the limited profits in one industry, they're all going to get less for their money.

Let's say that the widget industry is going to produce $100 billion in earnings over the next 10 years. If investors put $100 billion in that sector, they're paying a dollar for every dollar of future earnings. But even if people invest $1 trillion, those companies are probably going to earn the same amount of money. Instead, investors just paid 10 times more for those earnings.

The best case is you make no money. In a worse case, investors realize that paying $10 for $1 in earnings over 10 years is a bad investment. Valuations come back to normal and you lose. That gets back to one basic premise of investing: Pay a reasonable or cheap price for future earnings.

No sector of the market can keep going up forever. If you're thinking about investing in a gold fund right now, just think back three years and remember what happened to Internet funds.