Here we go again. It's time for financial publications to list all of the stocks and funds that fared the best and worst over the past year. While I admit that I find it hard to ignore the lists, I also have many misgivings about them.
How good are the best?
A main concern I have is that too often, people will rush out and snap up shares of a top fund, only to have it falter in the year or years ahead. I know this happens because I did it myself years ago, when I was a bit less savvy about investing. Here's how I described this blunder in a 2000 article:
"It was 1994, and I thought I was being smart. I read an article somewhere highlighting the amazing 1993 performance of Fidelity Emerging Markets (FEMKX) mutual fund. How amazing? Well, it grew an astounding 82%! I thought to myself, 'Gee, I'd love to earn something like 82% per year. Even if the fund doesn't do quite that well again, it's probably managed by clever people, and they should surely be able to find some wonderful companies in which to invest in the many emerging markets out there.' Well, after earning 82% in 1993, the fund hasn't fared quite as well. In 1994: down 18%. 1995: down 3%. 1996: up 10%! 1997: down 41%. 1998: down 27%. 1999: up 70%. Had I left $1,000 invested from 1994 through 1999, I'd have ended up with about $650. I learned that the mutual funds that do really well in one year often don't repeat that performance. And that one unusually strong year will inflate the average annual return that a fund touts in its ads for many subsequent years."
Interestingly, after a 33% loss in 2000, the fund has had an excellent few years lately, up 49% in 2003, 23% in 2004, and 44% in 2005. Am I kicking myself for not having hung on? Not at all. If my calculations are correct, that initial $1,000 would now be worth $1,043 -- hardly enough to have paid for all the antacid I'd have consumed over the years.
The best
So which funds were winners in 2005? Well, most are focused on specific geographical regions. The top two were Ultra Japan ProFund (UJPSX), up 73%, and ING Russia (LETRX), up 64%. The three among the top 10 that aren't regional are focused on energy or global resources. If you like volatility, you'll love these funds. Ultra Japan lost 48% in 2001 and 40% in 2002 before gaining 48% in 2003. ING Russia lost 83% in 1998 followed by a 160% gain in 1999.
All of this suggests to me that the funds didn't surge in 2005 because of management brilliance, but because they focused on areas that did really well in 2005.
If you wonder what, exactly, these funds invested in, well, when I last checked, the Japan fund was full of futures tied to the Japanese stock market, while the Russia fund held such recent winners as metal maker MMC Norilsk Nickel, which is up more than 60% over its 52-week low, and energy concern Tatneft (NYSE:TNT), which has just about tripled in the past year.
The worst
The story is similar among the worst funds of the year. One of them, Fidelity Select Paper& Forest Products (FSPFX), lost 10% in 2005. Its history is not all bad: It gained 30% in 1999 and 19% in 2003. Look at how paper companies have fared over the years, and you'll understand more. Weyerhaeuser (NYSE:WY), for example, gained a whopping 34% in 2003, and more in 1999. International Paper (NYSE:IP) gained 27% in 2003 and 29% in 1999. Procter & Gamble (NYSE:PG) gained nearly 19% in 2003. One of the fund's recent top holdings, with a full tenth of assets, is Smurfit-Stone Container (NASDAQ:SSCC), which is down about 25% from its 52-week high.
The worst fund, Van Wagoner Emerging Growth (VWEGX), fell 20% in 2005 and lost money in five of the past eight years. In 1999, though, it gained 291%! That represents a near-quadrupling of investor money. I'm sure that performance brought in new investors who soon regretted investing. Even its recent holdings are a mixed bag, sporting some losers as well as the amazing RedbackNetworks (NASDAQ:RBAK), which gained 162% in 2005 and is already up 25% in 2006! (Imagine how the fund would have fared without this holding, by the way.)
One interesting thing I noticed in all this is that the best funds on the lists have many years in which they performed much worse than the worst funds did this year.
Invest sensibly
So how can you fight your way out of this fog of nearly meaningless information? It's easy. Just stick with a broad market index fund, and you'll automatically do just about as well as the market.
If you'd like to do even better, you can. Seek out those few excellent funds with solid long-term track records and attractive prospects, ones with managers whose philosophies you respect. They are out there, though they're in the minority. We'd love to introduce you to some of them via our Motley Fool Champion Funds newsletter. Try it for free, and see which funds analyst Shannon Zimmerman has recommended. Together, his picks have gained an average of 20%, versus 8% for their benchmarks in the same time period. Out of about 35 picks, only two were under water.
Selena Maranjian owns shares of no funds mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
