Chasing Performance - Last Year's Hottest Mutual Funds

When deciding which mutual funds to invest in, do you base your choices on past performance? If the answer is yes, you're in the majority. A vast number of investors choose to invest in last year's hottest funds in the hopes that the market beating returns will continue. However, as we have all heard before, past returns are not indicative of future returns.

Despite the fact that there is no correlation between past performance and future performance, investors continue to blindly accept the advertising thrust upon them through financial magazines and national television shows. While a certain number of professional money managers will manage to beat the market each year, these managers cannot be identified in advance. Moreover, the likelihood that they will repeat the performance the following year is extremely small.

One reason that market beating performance is hard to repeat is that once a fund has been promoted to death by its parent company, its assets tend to explode. In keeping with the fund's objective, the fund manager must now invest this money into the markets. With this increase in assets, he tends to push prices up before he can complete his purchases. The opposite also holds true, when attempting to sell a large portion of stock, his volume pushes the stock down temporarily before it returns to its normal price. Any advantage he may have had has now disappeared due to "asset bloat".

Another reason professional fund managers have difficulty maintaining market beating performance is that whichever sector propelled them to success in the first place is unlikely to continue outperforming. They must then guess which sector will continue its upward trend. Needless to say, the odds of correctly identifying the next hot sector are miniscule.

Many proponents of active management will point to how Peter Lynch has been able to beat the market for many years. However, up to 25% of his investments were in international markets, and not in US markets. It is futile to compare his returns to an S&P 500 fund when the investments are so different. The more accurate picture would be comparing his fund to international funds, many of which outperformed the S&P 500 at the time.

Finally, five-star ratings can be deceiving depending on the track record chosen. A mutual fund company may be able to deceive investors into believing a fund beat the market by simply changing the time horizon in which they are reporting.

The only method to achieving market returns is to build a portfolio of low-cost index funds and ETF's diversified through many asset classes around the world. Forget about past performance and instead focus on the correlation of one fund to another and proper asset allocation.

Karl Borris is the author of http://yourinvestingblueprint.wordpress.com/, an educational resource for those seeking better investment returns through Nobel Prize winning strategies. Join him as he explains how to use asset allocation, low-cost ETFs, and annual rebalancing to secure a sound retirement for yourself and your family.

Tracking Mutual Fund Performance

Mutual Funds are one of the top investment choices for investors of all ages and styles. A mutual fund is effectively a group of investments bundled together under a common name and managed by professionals who seek to maximize the performance of the fund as a whole. It can provide a full spectrum of investments ranging from safe to risky and targeting a broad swathe of industries and can hedge against market shifts in one sector while simultaneously buying into a boom. Internal fund trades are managed in such a manner that an amateur investor doesn't have to closely analyze the specifics of each and every investment within the fund.

However, even the best hedged and most wisely run mutual fund should be monitored for performance to ensure money invested in the fund is being wisely managed. Watching the performance of mutual funds over time is a vital component of investing in them. Any legitimate broker or other investment entity makes mutual fund performance information available to a current or prospective investor. Usually this will detail it's performance over a number of years, often all the way back to the fund's inception. Changes in the fund's manager should be visible as well as the percentage earnings over year to date, last full year, last full three years, and last full five years in addition to the life of the fund. The percentage of the fund's resources allocated to particular sectors and to which major entities within that sector should also be readily available and should not suffer major changes too frequently.

Finally, this collective investment's rating as published by a reputable rating entity and its fee structure should be easy to find. Online Newspapers like the New York Times tracks the performance of mutual and exchange traded funds - http://markets.on.nytimes.com/research/markets/mutualfunds/mutualfunds.asp. USA Today provides performance information for the largest mutual funds - http://www.usatoday.idmanagedsolutions.com/funds/overview.idms

Tracking mutual fund performance is made possible by the information being published. While a mutual fund is generally an investment made for the long term, it is still essential to keep a close eye on its performance. Many of them change managers fairly frequently and a new manager may well invoke a different investment strategy that changes the trajectory of the fund. Some funds, while performing well in past years, fall into a funk and do not emerge right away. If an investor simply buys into a one and then forgets about it, it could begin to perform terribly relative to the market as a whole and become a bad investment. Keeping an eye on the fund throughout its life provides the investor with an additional hedge against the investment turning bad.

Some things to watch especially closely:

Does the fund's mix of investments indicate a shift to a more or less aggressive strategy?

Do the major holdings in sectors and companies indicate the fund is buying hard into a bubble?

Are the holdings getting too skewed to one particular economic sector so that the entire fund becomes vulnerable to an unanticipated downturn? Or, is the fund just underperforming the market year after year?

Mutual fund investing is not as hands on as trading individual stocks, but it can't just run on autopilot either. A savvy investor tracks mutual fund performance and makes wise, calculated decisions about when to buy in and get out.

For more information on Mutual Funds, visit http://largestfund.com/.