Start an Investment Deathmatch to Find the Best Investments

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You can learn a lot about investing by setting up what I call an "investment deathmatch" in your portfolio. In such a setup, your hand-picked investments compete with each other to produce the best return and rack up the biggest balance.

An investment deathmatch starts off by investing equal amounts of money in several investment funds at the same time. This makes it easy to monitor how your investments are performing relative to each other simply by glancing at the fund balances.

Some benefits of this "investment deathmatch" approach for your portfolio are:

• You get the experience of picking out multiple investments.

• You learn from seeing how different investments perform over time relative to each other.

• Your portfolio risk is reduced due to diversification.

• Based on your investment performance results, you can invest more money in your best performing funds.

Here's how to set up your own investment deathmatch.

1. Select categories of funds

While you could pick funds from the same investment category to compete in your deathmatch, there is more to be learned by selecting funds from a variety of categories. Plus, you will build a more diversified portfolio if you choose a variety of funds, reducing your risk in case one investment sector falters.

Here are some ideas for fund categories to choose from:

• S&P 500 index fund: A good "pace car" to see how your other investments perform relative to large-cap equities in the stock market.

• Growth fund: Will a growth fund provide better returns than the overall market?

• Mid-cap fund: Mid-sized businesses have established products and customer bases and lots of room to grow.

• Just-for-fun: Pick an international fund, real estate investment trust (REIT), gold fund, or whatever investment you think is interesting and could perform well.

2. Pick your funds

Now that you have outlined your investment categories, it's time to do your homework and pick your favorite fund in each category. Some of the key criteria to consider when selecting funds for your investment deathmatch are:

• Investment objective: Do you want an aggressive growth fund that takes higher risks to seek higher returns, or would you rather have a more conservative fund that will be more likely to protect your investment?

• Active vs. passive management: Do you want a fund with a fund manager making trades to try to maximize returns, or a passive fund that simply tracks a segment of the market?

• Fees (expense ratio): Funds with lower fees are best for maximizing the growth of your investment over time, but some investment types are more complex and tend to have higher fees. Actively managed funds have higher fees than passive funds and index funds.

• Performance record (return): While past performance does not predict future results, most investors tend to select funds with returns that have performed well compared to similar funds over the past one to five years.

• Management team tenure: Some investors prefer funds that have had a consistent management team for a number of years.

(See also: How to Invest in Mutual Funds)

3. Invest exactly equal amounts in each fund

With your investment funds picked out, the next step is to invest exactly equal amounts in each one. For example, for a $2,000 investment with four funds in your deathmatch, put exactly $500 in each fund to start off the competition.

The reason for putting the exact same amount in several investments on the same day is to make it easy to compare the performance of your funds simply by checking the fund balances at any time. You don't need to keep track of anything or calculate rate of return to evaluate their performance. Whichever fund has the biggest balance is winning.

Of course, you will need some money to fund your investments. If you already have cash in hand (in after-tax dollars), it might be easier to invest the funds in a Roth IRA rather than a traditional IRA. Another source of funding to start an investment deathmatch is to execute an exchange to sell funds you already own and move the proceeds into the funds for your deathmatch. This can be done easily in a traditional IRA, Roth IRA, or 401(k) plan.

4. Watch and learn as funds compete to make you money

Now for the fun part — watching your fund choices fight it out to see which will perform the best. The investment deathmatch format makes it effortless to see which investment are performing well simply by checking in on the fund balances. There is no substitute for the experience you get picking out funds and investing your own money to learn what works and what doesn't.

5. Start new investment deathmatches as a smarter investor

Over time, some of your investments will perform better than others. You might decide to leave the best performing funds in place and start a new deathmatch using funds from investments that are not performing as well.

You can pick a different amount to invest in each deathmatch you start so you can better track which funds are directly competing with each other. For example, if you have a deathmatch running with $500 investments, you could start another one with $1,000 investments so you can tell which investments are in which deathmatch.

The funds in your investment deathmatch are competing to win the title of best investment, but the real winner is you. You get an easy way to learn about investing all while watching your portfolio grow.

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