It's not always easy to make sense of the information that flows at us via the financial media. Consider, for example, this nugget that I ran across at investmentadvisor.com: "Standard & Poor's latest mutual fund persistence scorecard, released in mid-August, found that through June 30, very few funds were able to consistently repeat top half or top quartile performance."
According to the data, over the five years that ended in June, 2006, just 11% of large-cap funds, 8% of mid-cap funds, and 8% of small-cap funds were able to keep their berths in the top half of rankings for five years in a row. What percent of them were able to maintain a listing in the top quartile over the same period? Barely 1%.
Think about this for a bit, and you'll likely reach the same conclusions I did:
- Mutual fund performance can be volatile.
- A fund that does well this year may not do well next year.
This only bolsters the idea that most of us should simply stick with broad-market index funds, since they'll at least roughly match the market's performance.
Still, you probably can do better than that. The above data notwithstanding, there are a bunch of long-term outperformers in the mutual fund world, with talented management and reasonable fees. Our Motley Fool Champion Funds newsletter has recommended many such funds -- and its recommendations, on average, are beating their respective benchmarks by some 10 percentage points. (Try Champion Funds free for 30 days.)
It's also worth noting that much like stocks, sometimes you just have to be patient with some great funds. They won't always go up, and many will have occasional sluggish periods. Why? Well, many top-notch funds are highly concentrated, investing in just 20 to 50 companies. In such cases, if a few major holdings experience a slowdown, they'll drag the fund's performance with them. Consider, for example, Bill Miller of Legg Mason. His Legg Mason Value Trust
Look at the fund's recent top holdings. UnitedHealth Group
Details like this help me keep big-picture statistics (such as the percentage of funds that have remained in the top half of rankings year over year) in perspective. Fools like you may want to do the same.
Longtime Fool contributor Selena Maranjian owns shares of Amazon.com and eBay. Amazon.com, eBay, and UnitedHealth are all Stock Advisor selections. UnitedHealth is also an Inside Value pick. The Fool has a disclosure policy.