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How Do I Find the Best Mutual Fund?

How Do I Find the Best Mutual Fund?

It requires a great deal of due diligence, but investors should understand that past performance is not indicative of future performance. Focus on experience.

In the stock market, as with most things in life, hindsight is 20/20. There are countless lists on the internet with titles like “The Best Mutual Fund Families” and “50 Winning Mutual Funds.” It is important to understand that the names on those lists are a function of hindsight and not foresight.

A mutual fund that outperformed in one year does not guarantee the same performance the following year. In fact, according to historical data, most of the winners in a 3 or 5 year period will be the losers in the next 3 or 5 year period.

Theories of market efficiency or inefficiency abound, but in general funds will be pulled toward the line of regression (averages) for a hypothetical portfolio that contains all of the investments in the entire market. There is pretty much no denying that.

There will always be some active managers able to generate “alpha,” which is performance over and above their benchmark, but many times it is not a guarantee of future results, as the popular disclaimer states.

Actively managed funds generally have to sacrifice some of their alpha due to charging fees to pay the fund managers. Other funds may appear in the superlative lists due to lower fees that have given them an edge, but if they’re only following indices, it is likely that some active managers can outdo them in the coming years.

It may be ideal to have a portfolio which uses some actively managed funds and some indexed funds, and our best strategy is not to continually pick the “best” funds from these lists, but to follow an asset allocation methodology. Questions like the one above can never be answered definitively.

It is the ever-changing, dynamic allocation among various asset classes that is key, so we encourage you to learn more about it using the resources here at Tickeron.

What are Some Strategies for Diversifying a Portfolio?
What is the Difference Between Active and Passive Money Management?

Keywords: mutual funds, benchmark, active management, alpha, efficient market hypothesis, historical performance,
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