Investing, as Warren Buffett tells it, has two rules:

  1. Never lose money.
  2. Never forget rule No. 1.

Indeed, the reason that capital preservation is so important to fortune-building is that every dollar lost to high fees or poor investments will no longer compound in your account. So while 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:


Trailing 10-Year
Annualized Return

Current Holdings
Include ...

Frontier Micro Cap (FEFPX)


New Dragon Asia, QLT

American Heritage (AHERX)


EMC, Intel

American Heritage Growth (AHEGX)


Intel, Hythiam (Nasdaq: HYTM)

Apex Mid Cap Growth (BMCGX)


ImClone (Nasdaq: IMCL), Napster (Nasdaq: NAPS)

ProFunds Ultra Nasdaq 100 (UOPSX)


Nasdaq 100 Futures, Comcast (Nasdaq: CMCSA), Genzyme (Nasdaq: GENZ)

Van Wagoner Emerging Growth (VWEGX)


Anadigics (Nasdaq: ANAD), Emcore

ProFunds UltraBear (URPSX)


S&P 500 Futures

Ameritor Security Trust (ASTRX)


Halliburton, Wrigley (NYSE: WWY)

American Growth (AMRBX)


JPMorgan, Teradyne

Comstock Strategy (CPFCX)


US Treasury Notes

Sources:, Morningstar. Performance data through Feb. 21, 2008.

Even though these funds hold such solid names as Intel, and great growth stories like Adobe, 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 $400 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 18.3% annualized gains over the past 10 years. An investment there would have turned $10,000 into nearly $54,000.

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 take a look at the fees each fund charges, too.

While Wasatch charges no load and 2.1% annually, 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:



Expense Ratio

Frontier Micro Cap



American Heritage



American Heritage Growth



Apex Mid Cap Growth



ProFunds UltraBear



Van Wagoner Emerging Growth



American Growth



Ameritor Security Trust



ProFunds Ultra Nasdaq 100



Comstock Strategy



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 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 a significant margin. 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 is a Motley Fool Inside Value recommendation. Wrigley and JPMorgan are Income Investor picks. The Fool's disclosure policy is free to play.