You're constantly searching for investments that will give you the best returns. But you won't find them simply by guessing -- or by investing in the hottest sectors from past years.

Too many investors are swayed by strong past performance. Fund companies know this and use their successful records to gather assets. They aren't lying about their past numbers, but they also can't guarantee they'll keep producing those returns in the future. As tech investors found out in 2000 and 2001, chasing performance can prove disastrous for your portfolio.

"In" one year, "out" the next
This month's issue of the Fool's Rule Your Retirement newsletter -- which hits our online newsstands at 4 p.m. ET today -- takes a close look at the way markets behave and how investors should respond to changing conditions. Examining returns of various types of stock funds over the past 20 years, retirement expert Robert Brokamp notes how certain investment styles go from performing well to doing badly and back again over the years.

Looking at four funds investing in large-cap, small-cap, international, and real-estate stocks, you can see how asset classes come in and out of favor over time. Dividing the past 20 years into five-year periods, you can see that large-caps performed best twice but have been the worst performers recently. In contrast, international stocks have posted great returns recently but were among the worst performers in the '90s.

What not to do
Dealing with this phenomenon -- which Brokamp calls the "investment hokey-pokey" -- is one of the biggest challenges facing retirement investors. Finding the best-performing investments can mean thousands of extra dollars to help you in your golden years.

One simple answer may seem appealing. If chasing performance is so bad, why not do the opposite and invest in the worst-performing sectors of the market? That seems to be in line with common advice that you should buy low and sell high.

Unfortunately, investing in beaten-down sectors doesn't always work, either. As the Rule Your Retirement study shows, top-performing investments sometimes continue to perform well in following periods, while bottom-dwellers often stay there for a long while.

To illustrate this further, go back in time to last year and look at what were then some of the top performers from 2006-07. If you thought these stocks were poised to collapse, you'd have made a huge mistake:


Return, 6/4/06 to 6/4/07

Return, 6/4/07 to 6/4/08




MasterCard (NYSE:MA)



Research In Motion (NASDAQ:RIMM)



Union Pacific (NYSE:UNP)



Source: Capital IQ, a division of Standard and Poor's.

Similarly, just because a stock's a big loser one year, that doesn't mean it won't do just as badly the next:


Return, 6/4/06 to 6/4/07

Return, 6/4/07 to 6/4/08

Advanced Micro Devices (NYSE:AMD)



Avis Budget Group (NYSE:CAR)



Whole Foods Market (NASDAQ:WFMI)



Source: Capital IQ.

Smoothing the ride
Fortunately, there is a solution that works. Instead of trying to predict which asset class is going to perform best, just invest in all of them. Doing that over the past 20 years would have beaten the returns of all but one of those asset classes -- with far less volatility.

A well-tailored asset-allocation strategy eliminates the guesswork from investing. By spreading your investments among many different assets, you'll never have 100% of your money in a top performer -- but you'll get solid performance year in and year out.

Choosing the right investments is just one of the foundations of a successful retirement. To read about the others, take a free look at this month's issue of Rule Your Retirement. For 30 days, you can get a no-holds-barred backstage pass to everything we offer, including past issues, discussion boards, and other online resources -- all of which are designed to help you retire happy.

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