Very often individual investors choose mutual funds based on the historical performance of the fund. To many individual investors it seems logical that past great performance would only indicate a tendency for future great performance. According to a July 2013 report from S&P, this may not be the case.
Twice a year S&P Dow Jones Indices releases its Persistence Score Card. This reports tracks the consistency of top mutual fund performers over yearly consecutive periods asking the question, does past performance really matter?
The latest report shows that picking a fund purely based on performance is statistically a loosing game as very few funds can consistently stay on top. Out of 703 funds that were top performers as of March, 2011, only 4.69% managed to stay on top over three consecutive 12 month periods. Looking longer term only 2.41% of large cap, 4.65% mid cap and 4.65% of small cap funds were able to stay in the top half of their peers over five consecutive years.
So what is an investor to do? When picking a mutual fund you are really picking a fund manager. This fund manager is usually actively trading your money to beat his or her assigned index. They will have good years and bad years but statistically they will not beat their assigned benchmark over the long term. I recommend that investors look at investing differently. Here are some keys to a good investment strategy foundation.
You can view the S&P report here. http://www.spindices.com/documents/research/persistence-scorecard-july-2013.pdf
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