Investing -- as Warren Buffett tells it -- has two rules:
- Never lose money.
- Never forget rule No. 1.
Indeed, the reason 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 even though it's a worthy goal to try to 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 |
|---|---|---|
|
ProFunds UltraShort Nasdaq-100 (USPSX) |
(31.1%) |
Nasdaq-100 Futures |
|
American Heritage Growth (AHEGX) |
(29.3%) |
Intel, Hythiam |
|
Frontier Micro Cap (FEFPX) |
(27.3%) |
Authentidate Holding |
|
American Heritage (AHERX) |
(24.3%) |
Citigroup, NexMed |
|
ProFunds UltraBear (URPSX) |
(10%) |
S&P 500 Futures |
|
Apex Mid Cap Growth (BMCGX) |
(9.5%) |
FuelCell Energy |
|
Ameritor Security Trust (ASTRX) |
(9%) |
General Electric |
|
Van Wagoner Emerging Growth (VWEGX) |
(9.3%) |
Aruba Networks |
|
American Growth (AMRCX) |
(8.5%) |
UnitedHealth |
|
Comstock Strategy (CPFCX) |
(7.6%) |
U.S. Treasury Notes, S&P 500 Futures |
Sources: WSJ.com, Morningstar. Performance data through June 27, 2008.
Even though these funds hold solid names like GE, 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 $410 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 17.2% annualized gains over the past 10 years. An investment there would have turned $10,000 into $49,000.
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.
Wasatch charges no load and 2.1% annually, while 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 |
|---|---|---|
|
ProFunds UltraShort Nasdaq-100 |
None |
2.4% |
|
American Heritage Growth |
None |
2.5% |
|
Frontier Micro Cap |
4.50% |
18.4% |
|
American Heritage |
None |
14.2% |
|
ProFunds UltraBear |
None |
2.4% |
|
Apex Mid Cap Growth |
None |
7.5% |
|
Ameritor Security Trust |
4.75% |
16.4% |
|
Van Wagoner Emerging Growth |
None |
4.8% |
|
American Growth |
5.00% |
4.4% |
|
Comstock Strategy |
1.00% |
3.9% |
Source: Morningstar.
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 on 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 20 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.
This article was first published Nov. 9, 2007. It has been updated.
Tim Hanson does not own shares of any fund or stock mentioned. Intel and UnitedHealth are Motley Fool Inside Value recommendations. UnitedHealth is also a Stock Advisor pick. The Fool's disclosure policy is free to play.
