Investing -- as Warren Buffett tells it -- has two rules:
- Never lose money.
- Never forget rule No. 1.
Indeed, the reason that capital preservation is so important to fortune-building is that every dollar that's lost to high fees or poor investments is a dollar that will no longer compound in your account.
So while it's a worthy goal to try and identify the best stocks and the best funds, it's even more important to steer clear of the worst ones.
An ignominious list
Fortunately, the names of those bad funds are readily available. Here are the worst-performing mutual funds over the trailing 10-year period:
|
Fund |
Trailing 10-Year |
Current Holdings |
|---|---|---|
|
Frontier Micro Cap (FEFPX) |
(27.8%) |
Provectus Pharmaceutical, |
|
American Heritage (AHERX) |
(23.1%) |
Cisco Systems |
|
American Heritage Growth (AHEGX) |
(15.1%) |
Intel, NexMed |
|
Apex Mid Cap Growth (BMCGX) |
(10.0%) |
Taser, Baidu.com |
|
Van Wagoner Emerging Growth (VWEGX) |
(9.1%) |
GigaMedia, Ciena |
|
Comstock Capital Value (DRCVX) |
(8.1%) |
eBay |
|
Ameritor Security Trust (ASTRX) |
(7.5%) |
Alcoa, Apple |
|
American Growth (AMRGX) |
(7.0%) |
Hewlett-Packard |
|
Rydex Inverse S&P 500 (RYURX) |
(3.3%) |
S&P 500 futures |
|
Rydex Inverse Government Long Bond (RYJUX) |
(2.8%) |
U.S. Treasury bond futures |
Even though these funds hold solid names such as Intel and great growth stories like Baidu, they've managed to absolutely incinerate capital. A $10,000 stake in Frontier Micro Cap 10 years ago, for example, would be worth a measly $385 today.
That's a far cry from what you'd have earned investing in Wasatch Micro Cap (WMICX) -- a fund that operates in the same market cap space but has managed to turn in 20.3% annualized gains over the past 10 years. An investment there would have turned $10,000 into $63,500.
Why the fund you pick makes a difference
So what sets Wasatch Micro Cap apart from Frontier Micro Cap? Obviously, superior stock picking is one major factor. But also take a look at the fees each fund charges.
While Wasatch charges no load and 2.1% annually, Frontier takes a 4.5% cut on the front end ... and charges an 18.4% expense ratio!
If you think that's absurd, you're right. But high fees are a hallmark of terrible mutual funds. Consider our list again:
|
Fund |
Load |
Expense Ratio |
|---|---|---|
|
Frontier Micro Cap |
4.50% |
18.4% |
|
American Heritage |
None |
14.2% |
|
American Heritage Growth |
None |
2.5% |
|
Apex Mid Cap Growth |
None |
7.5% |
|
Van Wagoner Emerging Growth |
None |
3.7% |
|
Comstock Capital Value |
5.75% |
1.9% |
|
Ameritor Security Trust |
4.75% |
16.4% |
|
American Growth |
5.75% |
3.4% |
|
Rydex Inverse S&P 500 |
None |
1.4% |
|
Rydex Inverse Government Long Bond |
None |
1.4% |
The 100 top-performing mutual funds of the past 10 years, on the other hand, clock in with an average expense ratio of just 1.2% -- and it's no coincidence that funneling less money from their investors' accounts has helped these funds deliver far superior returns.
Beat the market
A fund with a low expense ratio is one of the most important traits to seek out in an investment vehicle and it's one we won't compromise when making recommendations for our Motley Fool Champion Funds investing service. But we don't stop there. We're also looking for superior stock pickers who invest in their own offerings.
Put it all together, and the funds we've recommended are ahead of their benchmarks by more than 15 percentage points on average. That kind of performance will help you build a fortune over the next few decades.
You can get out of the bad funds and into the funds we're recommending today by joining Champion Funds free for 30 days. Click here for more information.
Tim Hanson does not own shares of any fund or stock mentioned. Intel is a Motley Fool Inside Value recommendation. Taser and Baidu are Rule Breakers picks. GigaMedia is a Global Gains selection. eBay is a Stock Advisor choice. The Fool's disclosure policy is free to play.
