The Best Performing Mutual Funds Falter

How does someone decide which funds to hold in their portfolio in the future?  If you’re the gambling type, a dart board and some darts might do the trick.  Chasing the best performing mutual funds might not be much better than the dartboard method!

If you’re an investor like the majority of us, what do you do?  Most would start by looking at the past performances of funds to gain a better perspective of the future.  While this may be a start it’s not much more.

Looking at past performance is exactly what it sounds like – all you’re doing is getting a better understanding of the past.  It holds very little bearing on what the future will hold.   Past performances more often than not DO NOT yield the same performances in the future.  It’s like driving while looking in the rear view mirror, and a near certain cause for an accident.

Each of the following graphs represents actively managed mutual funds and how they ranked among their peers and how they typically DO NOT repeat their successes in the subsequent periods (with any consistency or predictability).

The best stock mutual fund performance:

For the equity graph, you’ll notice that only 32 of 377 mutual funds that were in the top quartile from 2002-2006 remained there from 2007-2011.  That’s a whopping 8% that maintained their successes over two consecutive five year periods.  With stats like this you’d be better off buying the worst performing mutual funds in hopes the trend reverses!  All kidding aside, the number gets substantially lower when it comes to bond mutual funds:

There were 184 funds in the top quartile of their respective category in 2002-2006.  Only 1 fund (.5%) maintained its successes amongst its peers through the next five year period of 2007-2011.  Those aren’t the type of odds I’m interested in as an investment advisor OR an investor!

The key is forget about past performance, and get a mutual fund investment plan that will stand the test of time!  A broadly diversified low cost portfolio consisting of primarily index mutual funds is the best way to start any investment strategy!  In our private financial advisor practice in Las Vegas we always start every client’s investment plan with that exact strategy!