The most recent results were posted online here where the best mutual funds for Q3 2012 clearly have a commodities angle to them.  Commodities funds roared in Q3, outpacing all other asset classes by a fair margin.

Of course the best mutual funds change constantly, and there are quite a few newcomers to the list of the best commodity funds.  This is why we started www.bestmutualfund.org – so we can illustrate that chasing the best funds will often times leave you in the dark!

Not ONE single commodity mutual fund from our “best mutual funds” list from Q1 2012 is on our Q3 2012 list.  We’re going to continue to shine the light on this topic because I see this every week in my Las Vegas financial advisory practice – clients have a desire to chase returns far too often.

Balance your investment holdings

Of course no investor would blindly just buy the best mutual funds on this or any other website (at least I certainly hope not).  Most investors do try to be balanced and diversified.  The problem is how they go about balancing and diversifying their investment portfolio.

Holding a lot of investment funds doesn’t make you diversified.  Owning different mutual fund managers doesn’t make you diversified.  Having an investment statement with 50 pages doesn’t make you diversified.

What makes you diversified is owning as many non-correlative asset classes as is reasonable for your portfolio.  This can be done through one mutual fund – or 10 mutual funds!  Though I would rarely see the case for more than 12 or so holdings.  In our largest client accounts we have about 12 to 13 holdings, but each holdings is entirely unique and distinctly different from the other holdings.

Also check out the best mutual funds total return year to date for 2012.  You can essentially throw out the number one 2 times leveraged NASDAQ fund – we never recommend leverage in your mutual fund holdings.  But it’s interesting there’s some biotechnology as well as real estate in the mix.

And the winner is…..

The Rydex Nasdaq 2X Mutual Fund!  So far through 8/31/12 the double leveraged Nasdaq mutual fund by Rydex has been the best performer.  Hold your horses though, this is a LEVERAGED mutual fund!

Leveraged Mutual Funds

A leveraged mutual fund means that the mutual fund manager is using derivatives such as options or futures contracts to get increased exposure to the investable assets (stocks or bonds etc.).  Sometimes these are what we call LONG leveraged funds (simply meaning we want the stock market or whatever investment asset to go way up) or SHORT leveraged funds (meaning we are betting the market or investment asset will drop like a rock).

The fact is leveraged funds are highly aggressive and very risky.  If you bet the right way – you’ll be a bigger winner.  Bet the wrong way and you’ll be a much larger loser!

There can also be a great degree of tracking error with leveraged mutual funds.  For example if the Nasdaq index went up 10%, the leveraged mutual fund may only go up 17% – NOT the two times leverage they’re taking.  This is due to how they reconstitute the mutual fund (far to complicated for this blog post, but suffice to say the leverage doesn’t always track like it should).

We never use leveraged investments with any clients.  It’s just not worth the risk.

The Best Mutual Funds for 2012

Clearly the best asset class so far this year is US equities, specifically those traded on the Nasdaq.  Nasdaq companies are generally more technology oriented.  Will that remain as it is now?  No telling, no predicting.  The next best performer could be Greek debt obligations for all anyone really knows.

Stick with your long term investment plans and stay the course.  Don’t be lured by the allure past performance.

Mutual Funds Investing

While the site is very new and raw, some topics we plan on covering are:

• What are mutual funds
• What types of mutual funds are there
• How to invest in mutual funds
• What are the best mutual funds
• Mutual fund objectives
• Mutual fund investing advice
• Mutual fund ratings
• Types of mutual fund management – active and passive
• Types of mutual funds by objectives – such as growth, income, socially responsible etc.
• How to compare mutual funds
• And much much more

If you have any ideas for the mutual funds investing website please contact us here at Investment Plans.  We’ be happy to blog or cover any ideas you may have.

CGM mutual funds Focus Fund states that long term growth of capital is their objective.  The company doesn’t list a lot of information on their website however, but they do have a couple other funds:

Don’t Chase Mutual Fund Performance

The CGM Focus fund was the top performer for the decade ended 2007.  I even had clients asking me to swap out their current funds and look into it – to which I promptly replied “No”.  The thing is I don’t really care much how well a fund has done if it’s not ranked well across a broad spectrum of fiduciary tests, such as the ones by Fi360.

There’s no doubt he had great performance.  He made big bets, he hit the right ones.  This does happen.  In fact statistically I’m surprised it doesn’t happen more often (that managers outpace their benchmark counterparts).

Ken Heebner was the manager of their flagship fund – the Focus fund.  He was noted as “one of the all time greats” by Fortune magazine in 2006 in fact.  He was on top of the world, but as history has taught us jumping on the ship at the wrong time spells disaster.

The CGM Focus Fund – Performance Waned

Since 2007 the fund has enjoyed ONE STAR performance from Morningstar.  Unfortunately in 2007 investors were clammoring to jump on the Focus Fund ship, only to see it sink with them on it.  In fact in 2008 it was down nearly 50%!!!  Making big bets means you can get killed by those same big bets that made you money before.

Relative to it’s peers, the fund ranked in the 96th, 99th, 35th, 100th, and 99th percentiles in 2008, 2009, 2010, 2011, and 2012.  Abysmal performance for sure.

Most of our portfolios for our private clients, and those of www.InvestmentPlan.com have average blended fees of about .35%.  Perhaps the 1.05% expense ratio of the Focus fund helped weigh on it’s performance (though high, it’s still less than the 1.25% average mutual fund expense ratio).

Fund Shareholders Jumped Ship!

As one would expect, investors ran for the doors and the fund has seen over 2.6 billion in outflows since 2008.  While this probably signals a great time to get in – we’d still hold off.  The fees are too high and the bets are too big.

Get a Plan, Stay the Course!

While it may feel good at the moment – to buy into a star mutual fund – it’s not going to help you achieve your goals over the long run.  Is the extra little bit of performance going to change your life?  Will the potentially devastating losses change your life?

Slow and steady wins the race.  Investors would be well served to learn this lesson and make future decisions more wisely.  As we’ve stated from the beginning, we’d rather be the turtle and reach the finish line than the hare and run ourselves out of gas!

Remember Don’t Chase The Best Mutual Funds!

The best mutual funds rarely maintain their status over subsequent periods.  We NEVER recommend chasing performance, but rather we recommend you build the best investment plan for your specific situation.  The fact is there is far more to consider when looking at mutual funds and their rankings.  Morningstar ratings mean little if anything at all.  Same with Forbes honor roll and whatever is hot on the cover of Money Magazine.

One of our best mutual fund ranking factors is how well the mutual fund managers rank overall as a fiduciary to their shareholders.  Fund companies that deliver what they say and treat their shareholders well are ranked highly.

Is Your Mutual Fund Company On The List?

Mutual funds that consistently score poorly don’t rank well, and we avoid them like the plague. The fact is our mutual fund review process includes narrowing down the list of over 10,000 mutual funds and ETF’s to about 10 to 20 for a given asset class, then looking closer at fees and mutual fund fiduciary rankings.

All of that being stated, here’s the list of the best stock mutual funds for 2012.

Enjoy!

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!

One of the presentations I enjoyed was on the subject of real estate investing – more specifically REITS and REIT mutual funds.  There are different forms of real estate investing:

• personal residence
• second residence
• rental home
• direct commercial property
• limited partnerships
• REIT – publicly traded and non-publicly traded
• real estate funds

The factors which may influence your investment in real estate or REIT mutual funds are:

• complexity of ownership
• custody of assets
• diversification of your portfolio
• up front and ongoing due diligence on the property
• E&O insurance coverage
• fees
• income generated
• liquidity of the investment
• minimum investment size
• portfolio manager experience and style
• the portfolio returns or expected returns
• taxation of the type and form of real estate entity
• how is the entity or investment valued initially and ongoing?

REIT mutual funds should never be purchase if they have a commission associated with them – but that goes without saying for our practice.  Mutual fund fees and commissions always directly reduce your investment performance.

As a fee only financial advisor we never recommend commission based products.  The presenter felt the same – Paul with Mallard Advisors recommended if the fees are difficult to understand or if they can’t be calculated easily avoid the investment!

In addition, reit mutual funds have a net asset value – or NAV.  The properties are worth a certain amount at any given time, yet the value of the fund may stray from that net intrinsic value because reits aren’t valued daily or literally by the second as other stocks and bonds are.  This makes reit mutual funds more challenging to assess.

There are many factors to consider with REIT mutual funds and other types of real estate investing.  There is no clear cut answer as to whether REIT mutual funds are right for you or not.

In our private practice and through our online investment plan and review service, we always recommend REIT mutual funds for a component of diversification in every investors portfolio (unless circumstances such as overexposure to individual properties exist).

A stock’s value orientation reflects the price investors are willing to pay for a share of some combination of the stock’s prospective earnings, book value, revenue, cash flow, and dividends. Morningstar measures a stock’s value orientation in relation to its scoring group (groups based on style zone and size).

We like to think of growth versus value in a risk/reward context. Take for example if WalMart and Kmart went to the bank for a loan. Who would get the lower interest rate and better terms?

Kmart is far more risky. WalMart is eating their lunch business wise, and frankly Kmart is struggling to survive in a WalMart dominated retail sector. There’s a lot more risk with Kmart, and far less risk with WalMart.

Kmart generally isn’t trading at the same premium to earnings that WalMart is either. Kmart being more risky is trading at a much lower price per share of earnings. WalMart is likely going to trade at a premium because it’s far more stable and more likely to repay the loan timely and in full.

The bank would give WalMart the loan at a far lower rate. The bank’s risk is lower and it’s return is lower. WalMart is a growth stock in this example.

The bank would probably hit Kmart with a much higher rate of interest because they have increased risks associated with lending Kmart money. Kmart is a value stock in this situation.

Which Is Better Growth Or Value Mutual Funds?

Growth stocks and value stocks and every mutual fund owning either act differently in different market cycles. Sometimes growth mutual funds outperform value mutual funds.

The majority of time however, risk and return are purely related. The more risk you take (Kmart for example) the higher the long term return because of the associated higher risk. The lower the risk you take (WalMart) the lower the investment returns over long periods of time.

Investors should invest in both growth and value mutual funds for the long term in various percentages according to a specific asset allocation model.

Asset allocation is how an investment manager allocates investment assets among various asset classes. Generally the goal is to reduce investment portfolio risk as much as possible, while achieving a target long term investment risk/return profile.

For example, a moderate investor may allocate his or her assets over a mix of 50% stocks, 10% commodities, 35% bonds and 5% cash.