I saw a recent article by Mark Hulbert in the Wall Street Journal. Mr. Hulbert follows newsletters and digests them and makes the info digestible for the rest of us and he’s been doing it for a long time.
One of the things he said was to be wary of jumping into a fund that was the leader the previous year or the best one. Ordinarily, the fund at the top of the rankings is an actively-managed fund, and oftentimes, it was the best performing fund because it took more risk. And sometimes, it’s the best performing fund because you got lucky in taking that risk.
Not always. You don’t know if it’s luck or skill, but in any one year, you can’t say that you know it’s skill. It could be luck. And then so if that luck turns and you have an outsize risky portfolio, well, it might do poorly next year.
He said there’s a lot of info and fund data that backs that up. High-performing funds tend to have reversals where they lag far behind the funds that they had recently beaten.
I’d suggest that you are better served looking for funds that perform well, in the top half or top quartile in their peer group, but picking the absolute best fund is probably not a good idea. If it happens to you and you’ve gotten it and it did well and it’s lucky, that’s great, but don’t think that it’s necessarily going to last.
There are also a lot of other considerations that go into picking funds. This article resonated with me because I’ve seen a lot of people just pick some year’s winner and get disappointed when it turns out not to be a great long term investment
My name is Mike Garry, and my company is Yardley Wealth Management. We are a fiduciary, fee-only financial planning, and wealth management firm in Newtown, Pennsylvania. (That’s in Bucks County). If you’d like to talk about this or anything else, please reach out: 267-573-1019, [email protected] or @michaeljgarry
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