Fund's Past Performance No Guarantee of Future

Physician's Money Digest, May 2006, Volume 13, Issue 5

Investor's

Business Daily

When choosing a mutualfund, physician-investors lookat previous performanceas a guideline. Yet thepast quarter's or year'sresults may not indicatefuture performance.In fact, a fundthat does performwell in the short term maynot do well over time,according to . The reason?The road to greatgains over a long periodof time is bumpy—even for the top funds.For example, the top 30 US diversifiedstock mutual funds from December 1994to December 2004 averaged returns of17% to 26% during that time. But only sixfunds in 2004 returned more than 15%,and the average return during that yearamong the 30 was 7.72%. What does thismean? According to the article, outperformanceusually occurs in one or a few segments,but is not spread over the entiremarket. When the market begins to favor adifferent segment, a top fund will falter. Soif you pick a mutual fund based on a great12-month performance, chances are thatit will not perform as well the next year.What's an investor to do? Don't writeoff a fund that has performed wellover time, but may not have livedup to its reputation in the shortterm. Past performance cannotpredict returns, but it can give aclue: Top performers tend to stay inthe top half year to year, and thebottom 10% tend to stay the same.