Chasing returns on your investments can be a mug’s game. It’s also human nature so can’t be said to be “wrong” per se. Our U.S. finance correspondent has his own take on the matter:

Have you ever been in thick traffic, trying to figure out which lane will move fastest? Sometimes it’s really hard to tell which lane is the fast lane. If you’re like me, it’s whichever lane you’re not in. Get in a different lane, and it changes again. It’s kind of like that with investing.

When you are stuck in traffic, you have a few options. You can decide that things are slow and you’ll get there when you get there, or you can “optimize” your travel by switching lanes. How do you know which lane is best? It’s the one that’s moving faster than you. Now, if you’ve ever tried this, you know that you can get a stiff neck and a stiff turn-signal finger (you are using your turn-signal finger I hope). What’s more, you might not get anywhere any faster than if you just picked a lane and stuck with it. You might even slow your travel by switching lanes!

What does this have to do with investing? Plenty. People sometimes “chase returns” and put their money in investments just because they’ve been hot in the past. It might work, but it might not. Most experts suggest taking an alternate route: do a good job mixing up your investments, and ignore the daily rat race of market performance. You save a lot of time and energy, so you can spend your days doing the things you value. Really, would you rather spend the summer poring through financial data, or would you rather go to a BBQ and do about as well (or better) in the markets?

That may seem an idle question since most people would answer: “In the local shopping mall”. But, if you’re reading The Money Blog, you would probably give a different reply. Here’s our U.S. finance correspondent to give his answer:

What should you do with your idle cash? Let’s say you’re responsible and you’ve accumulated an emergency fund. This is money that you can’t take risk with, but it would be nice to earn something on it, right? Depending on what you want, the world is full of options.

You can always leave it in a checking or savings account. Of course, you won’t earn much. Most brick and mortar banks are still paying almost nothing on deposits. However, the internet bank accounts make it more appealing. HSBC, INGDirect, and Capital One all have competitive rates these days – with no fees or minimum balance requirements. Whatever bank you use, make sure it’s FDIC insured.

You can also use money market funds. These are technically mutual funds that invest in short term issues. The advantage of a money market fund over a bank product is that the interest rate will likely change more rapidly (of course, that’s only an advantage if rates are going up and not down). The disadvantage of a money market is that there’s technically a possibility that you can lose your money if the underlying “money markets” fall apart. Read the fund’s prospectus to see what it invests in, and how you feel about that risk.

With a money market, you can sometimes get a checkbook to access your cash. They don’t like for you to write small checks, so they impose a minimum check size (like $500 per check). With a bank product, you usually link your account to a checking account and move money electronically when you’re ready to spend it. With either type of account, you can make deposits by check or electronically.

Which is better? It depends. Look them both over, compare rates, and figure out what suits your needs.

If you don’t know what asset allocation, or lifecycle, funds are, here are a few words by our U.S. finance correspondent:

One of the neatest things to hit your 401k may be “lifecycle” funds or “asset allocation” funds. These are investment options that are mixed up into different types of investments – all in one fund. The reason they’re neat? They make it easy to accomplish one of the most important things an investor needs to do – diversify.

You’ve heard the saying about having all your eggs in one basket. In your 401k, that means that you should consider mixing your savings up among a variety of investment types. For example, you might want some of your dollars invested in the big US companies, some of them in the small US companies, some of them in foreign stocks, and some in bonds (you can even mix it up among different types of bonds – government, corporate, foreign, etc). Depending on your investment menu in the 401k, this can be easy or hard.

If you’ve got “lifestyle”, “lifecycle” or “asset allocation” funds in your 401k, it’s often easy to use one of these funds to help you diversify. You pick one that’s right for you, and let the experts choose how much to put into each type of investment.

Of course, diversifying doesn’t mean you’ll always make money – or that you’ll never lose money. However, it improves your chances while reducing the ups and downs, and that’s about all you can ask for. And as always, you should read a prospectus for important details on any fund before investing.