Wouldn't you know it? Just after I posted on how Money magazine isn't a stock/fund hype-fest like other personal finance magazines, their February issue contains "The Best Mutual Funds You Can Buy" and ranks 1,000 top funds from 2006. Yikes!
Yet the difference in Money's perspective is shown inside the magazine in the editor's column. In it, editor Eric Schurenberg notes that they are publishing the results so that people can see how they did -- not as a predictor of how they will do in the future. He says:
If you try to use the tables...to divine which funds will perform best in the future, you'll be making the oldest mistake in the book. How a fund did in 2006 tells you nothing -- repeat, nothing -- about how it will rank in the future.
Yep, that's true. Past performance does not predict future performance.
Later in the piece he makes a comment that I agree with totally:
Savvy investors and honest advisors know that it's impossible to identify top-performing funds in advance. But it is entirely possible to pick ones with low costs, responsible, stable management and a consistent investing style. Such funds generally don't post home-run returns, but they do what they promise year after year without exposing you to undue risk or siphoning off your profits in high fees. The result is a better experience than you'd get from chasing what looks hot today.
Two words: index funds. ;-)
It's impossible to tell which funds you should buy, but easy to tell which funds you SHOULDN'T buy. :)
Even if past performance says something useful about probable future performance, a fund that did exceptionally well last year is likely to start out this year rather massively overpriced, so that even if the fundamentals remain strong and the underlying assets perform well, net yield for new entrants will be signficantly reduced.
Posted by: Matt | February 08, 2007 at 01:02 AM