PDA

View Full Version : Taking last year's top mutual fund


2ndGoat
05-30-2003, 05:44 AM
I'm not even a newbie with stocks, I'm worse. If mutual funds are too boring for this forum, I apologize.

I read an article today that say that over the last 20 years or so, putting your money in the top performing mutual fund from the last year every year gave a 5% higher return per year than the S&P 500 (which I take it is a benchmark). Could some of you knowledgeable folks share your thoughts?

Thanks,
2ndGoat

MaxPower
05-30-2003, 03:58 PM
I would ignore the article. You can always look backward and find some trading rule that would have been profitable. It does not mean that it will be profitable in the future.

I'm skeptical. Why did they use only 20 years of data? Are they including mutual fund fees, capital gains taxes, transaction costs, etc? One or two years that happened to have large returns could account for the whole thing.

If you have a link to the article I'd like to see it.

Wildbill
05-30-2003, 04:03 PM
That sounds like bad advice, but maybe its right never really looked at. In general if you got into the best performing sectors the next year you would get killed and the worst performers usually, but not always, did much better the next year. In general just remember the market when it comes to sectors is very cyclical. Something happens that gets a story out and then the herd follows it until they find another story and then the sector sucks. In any event, NEVER make your decisions on anything based on a 1-year return. When it comes to mutual funds there are plenty of sources of ratings, and all place a lot of emphasis on 3 and 5 year returns against a reasonable benchmark. In your case best thing to do is look at who is doing well over the longer periods and look at what they invest in. Think about your time horizon, if you are in it for the long run then loads can actually benefit you if the expense ratio is lower, certainly not a given. If you tend to rebalance a lot, then only go with a no-load fund. With the funds I have (related to retirement money so taxes aren't an issue), I just look to keep some semblance of balance by using 3 or 4 funds. Based on how the last two years have gone, I make some rebalances often slightly weighing the underperforming sectors by a bit. This has done well as I kept adding a little to global funds for 4 years and its really paying off for the moment. This is key, be balanced globally and across sectors and look for things to tend to even out over time. However, don't bet on it too much, in the end having something close to your desired allocation is what you need to do.

Pauliman
06-03-2003, 02:27 PM
Investing in "last year's top mutual fund" is like driving using your rearview mirror, it flat out makes no sense and whatever article that said that is telling Bold faced lie. i work in the investment business and have many graphs and charts to prove that statement to be FALSE. Different parts of the market have leadership at different times, and to invest in last years hot fund usually means u are in the bottom of the barrel within a few years. This is why any sound investment advisor preaches constantly about ASSET ALLOCATION, for the simple reason NO ONE can predict what fund will lead the market eash year. Thats why the "hot fund of last year" is terrible advice, which most likely was readin a rag magazine like Smart Money or Barron's

meet with a professional and get a plan put together, instead of reading crackpot advice from rag magazines.

regards

pauli

2ndGoat
06-03-2003, 07:06 PM
Thanks for the replies everyone ... I guess I got the answers I expected. I haven't located the article again, but I believe it was in smartmoney.com, which one poster already derided as trash. I may also have been misrepresenting the idea of the article, what with my extremely limited understanding of investments, but I believe I got the general idea.

One thing I do recall seeing that I didn't mention in the post- I believe the advocate of this system only including stocks with a low, what was it, beta? Seemed to be some measure of the volitility of the fund. Certainly adds a measure of sanity, if not soundness, to the advice- anyone can beat the standard in positive times by taking more risk. Regardless, I was skeptical, and got plenty of confirmation here.

2ndGoat

crazy canuck
06-04-2003, 08:41 AM
I would disagree with previous posters. This is what my girlfriend does for a living (picking mutual funds for pension funds), and pretty much this is the strategy they use...of course after selecting the mutual fund with the most favorable risk/return they do some additional analysis, but basically there isn't much more to it.

Pirc Defense
06-10-2003, 11:56 PM
I used to be a broker and just about the only thing that makes sense for the vast majority of investors in to make regular deposits into a mutual fund that indexes either the Dow or the S&P. Pick the one with the lowest fees because they all perform the same otherwise.

You cannot consistently pick which funds will perform well. Nobody can.