How much should you consider past performance?
- Alan Lavine and Gail Liberman
You hear so much hype about past performance. But is past performance truly an indication of future results?
Not necessarily. If a mutual fund has a good long-term track record, it can mean that it's well managed. But there is no guarantee that great performance will continue.
Morningstar Inc., Chicago, tracked the top 10 performing large company stock funds that invested based on a combination of value and growth in 1997. Over the following 10 years, ending in October 2007, they did not always continue to perform up to snuff.
Four of those top 10 underperformed their peers. Meanwhile, six outperformed similar funds.
If you happened to be in the six funds that performed well over those 10 years, consider yourself lucky.
Investment gurus often use a number of tactics to identify winning funds. Among those strategies:
Always invest in the top performing fund of the year for the next year.
Invest in funds that show the best combination of long-term and short-term performance.
Trade funds based on price trends, such as a moving average or relative strength. The idea is that if the price is trending up, it will continue to do well. If the price is trending down, it will go lower.
Bottom fish and invest in the worst-performing funds.
Be advised. Your chances of doing well over the long term with any of these tactics are slim to none. Financial research shows that market timing doesn't work. You can invest only to see your fund decline. Or, you can sell a fund only to see it later rise in value.
In most cases, when the overall stock market goes up, so will your stock fund and vice versa.
On the other hand, if you invest regularly in well- managed funds, you'll likely outperform the market in some years and lag behind in others. So if you can find a stock fund that performs as well as the overall stock market with less risk, you're doing a great job!
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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