The other day, turning to the business section of my local newspaper, I saw a frustrating kind of article I've seen many times in my life -- one recapping the performance of mutual funds. What's my beef with it? Well, let me count the problems.
For starters, there's the title: "Funds in a funk: Both stock and bond mutual funds post losses in the first quarter." Are funds in a funk if they have a bad quarter? Do we really expect funds to march upward relentlessly, without ever receding some? (I hope not, as that's quite unrealistic.) Do we expect stock and bond funds to always offer the reverse of each others' performance? (I hope not, as that's silly, too.)
Next, the article was accompanied by several tables. The first listed the 15 biggest funds, featuring the Vanguard 500 Index Fund
Another table listed the 15 funds that sported the best performance over the first quarter that just ended. A naive reader might see this list, drool at the 20%-plus returns of some of the funds (in just one quarter!), and buy into some of them. Ouch. Bad idea. Remember, this list is not showing you which funds will outperform in the next quarter -- just the last one. A fund that does spectacularly well in one quarter isn't likely to repeat in the next quarter. I myself was a naive reader several moons ago. I bought into a fund that had rocketed ahead 86% in the past year, only to see it shrink in value over the next years. Many times, unusually good performance is just luck.
The important thing to remember is that with responsible stock (and stock fund) investing, you should have a long time horizon -- at least five years or so, and ideally 10 or more. Given that, you should not pay much attention to short-term moves. Over the summer of 2001, shares of eBay
If you're not going to sell your stock or fund shares today or tomorrow, how important is it where they are today? What really counts, what really affects your ultimate performance is (A) where they were when you bought them and (B) where they are when you sell, very likely many years from now.
So ignore these silly headlines and tables. (Where was the table showing which funds have shareholder-friendly policies, low fees, strong long-term track records, and smart and effective managers?) You can meet the market's average return by investing in a simple index fund, which we recommend for many, if not most, investors.
And if you want to do even better than average, you can. To get pointers to outstanding and promising mutual funds, grab a free trial of our Motley Fool Champion Funds newsletter, and see which funds analyst Shannon Zimmerman has recommended. Together, his picks have roughly doubled the market's return, with nearly half racking up double-digit gains in the last year. (The free trial will permit you to peek at a list of all his recommended funds.)
Learn much more in these enlightening Zimmerman articles:
- The Case for Mutual Funds
- Slam-Dunk Mutual Funds
- You're Paying How Much?
- Champion Funds Still Beating the Market
Longtime Fool contributor Selena Maranjian owns shares of eBay. The Motley Fool has a disclosure policy.