Quick: How'd you make your last fund investment decision?
If you're like many otherwise razor-sharp folks, you may well have made it on the basis of past performance. That's fair enough, as far as it goes. Trouble is, it doesn't go nearly far enough.
It's all relative
For starters, even a fund that seems like a past-performance powerhouse can actually turn out to be an underachiever on closer inspection.
For example: What if I told you about a fund that's cranked out a total return over the past five years of 50% while Vanguard 500 Index
Actually, no -- at least not if it's a small-cap fund. For the five years that ended with December, the average fund in Morningstar's small-blend category has delivered a total return of roughly 62.7%. Any fund that falls below that mark has therefore been a laggard on an apples-to-apples basis.
And don't forget, 62.7% is just the average. What might you accomplish with the kinds of superior funds that we recommend each month in the Fool's Champion Funds newsletter service? One of my favorite small-cap picks -- the now-closed Royce Premier (RYPRX) -- has climbed more than 100% over the past five years and has appreciated more than 40% since July 2004, when I first recommended it to our newsletter's subscribers.
Another reason a fund's track record ain't all that (as the kids used to like to say) is that its strategy may not be a good fit for your timeline and risk tolerance.
In 1999, for example, the exchange traded fund (ETF) known as Cubes -- which tracks the Nasdaq 100 and tech heavyweights like Intel
Credit where credit's not due
Last, but not least, judging a fund by its performance history can be misleading because that track record may belong to a manager who has made like Elvis, so to speak, and left the building.
If that's the case, the fund's past performance obviously can't be used to gauge how it's likely to fare in the future. When you invest in mutual funds, after all, you're really investing in their managers, and you should make your decisions based on their track record, not that of the fund itself. (Click here for the fuller scoop on why management matters.)
Don't get me wrong. Past performance is a useful tool in any fund investor's toolbox. On its own, though, it's the proverbial little bit of knowledge that can be a dangerous thing. With that in mind, as I go about the business of cherry-picking mutual fund keepers for our Champion Funds subscribers, I always consider a fund's historical track record in tandem with managerial tenure, stock-picking strategy, tax-efficiency, volatility, expenses and ...
The Foolish bottom line
Well, you get the picture. If you'd like to try the newsletter, you can do so for 30 days. Your free trial grants you access to our back issues and the complete list of fund recommendations that, taken collectively, has beat the market by more than 11 percentage points since Champion Funds opened for business. Our model portfolios and members-only discussion boards are part of the package, too.
All told, if you're looking for the cream of the fund industry's crop -- or perhaps some Foolish wisdom about how to judge the funds you already hold -- I think we have a lot to offer.
A brand-new issue of Shannon Zimmerman's Champion Funds newsletter releases today at 4 p.m. EST. Click here for a trial, which will give you access to today's issue (and all 30-plus back issues).
Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He doesn't own any of the companies mentioned. Microsoft and Pfizer are Motley Fool Inside Value recommendations. The Fool has a strictdisclosure policy.