Some things never change, especiallywhen it comes to mutual funds.Throughout history, swarms of investorshave chased the hottest mutual fundmanagers or the hottest mutual funds,instead of looking for experiencedmutual fund managers who are consistentor mutual funds that continuallyperform well but aren't often at the topof the fund pack. Unfortunately, chasingthe hottest mutual fund manager orfund is a sure way to lose money in anymarket—and the record proves it.
Recently, showed achart of the 10 best-performing USmutual funds (out of 851 funds with atleast $100 million in assets) from 1996 to1999 and their subsequent performancesover the next 3 years (ie, 2000, 2001, and2002). If you're not familiar with the waymutual funds work, the study's resultsmay offer you a few surprises.
The number-1 mutual fund for the1996 to 1999 period ranked 841st in theyear 2000. The other top 4 mutual fundsin the same period fared just as poorly.The number-2 mutual fund dropped to832nd place; number-3 slipped all theway to 845; and number-4 received thehighest ranking of all 4 funds at 791. Ofthe top 10, not a single fund rankedhigher than 790. Time was not kind toany of these funds. However, when itcomes to mutual funds, time is not onthe physician-investor's side.
Over the 18-year period ending in2002, the average mutual fund investorwho invested $10,000 in a mutual fundearned only $6200 ($16,200 altogether),and that was during the greatest bullmarket in history—a period in which themarket rose 9 years in a row. Even moneymarket funds performed better than that.As a comparison, that same $10,000investment in an index fund would havegrown to nearly $90,000. Why did theaverage mutual fund investor earn so littledespite a thriving market?
There are 2 reasons why these investorssaw such little growth. One reasonis because investors tended to switchinto the hottest funds just as they werepeaking—1 reason why so few investorsdo well in stock mutual funds. They'realways chasing a comet that's flamingout. Another reason why these investorsearned so little is because they tended tosell when stock prices were low and tobuy when prices were high, as opposedto dollar-cost averaging through thickand thin.
As one financial writer once said inregard to mutual funds, "The real comedyhere is that mutual funds are generallysold to the public based on theirrecent performance. In essence, mutualfund companies are knowingly sellingthe funds that have done well recently,funds that they know are probably pasttheir prime and due for a period ofsevere underperformance." If you're aphysician-investor interested in mutualfunds, make sure you select a mutualfund manager who has a consistentrecord and that you choose funds thatcontinually perform well. Aim for the stars, but don't botherchasing fading comets.
Bill Staton is chairman of
Staton Financial Advisors
LLC, a money management
firm whose accounts were up in
2001 and again in 2002. Join
his free weekly "Dollar-Bill
Club" and get a no-obligation trial to Bill's
weekly "E-Money Digest" by e-mailing him
at email@example.com. He welcomes questions
or comments at 704-365-2122 or 704-
365-1910 (fax), or visit www.billstaton.com.