Past Performance

Past performance is not always reliable. Many investors sink their cash in last year’s top mutual fund listed in a magazine or on a financial news channel. You should not be one of them. You need to realize that when the best performance is listed it is last year’s performance. It did this capitalizing on opportunities which were already offered and expired. There is no guarantee the fund can continue to do this in the present year. Investors who place their money in peaking or peaked funds may be in for a disappointment if the fund levels off toward industry averages.

A fund’s ability to provide returns is based on the managing team’s capability to find opportunities and seize advantage of them. Your primary indicator of that capacity is past performance, but you should not chase history. Managers cannot repeat their past miracles easily. They are dependent on the opportunity being available and recognizing it in time to capitalize on the chance. As a result, funds often underperform after outperforming averages, benchmarks, and indexes. Finding a management team which can steadily perform average or better is better than last year’s “hot performer” mutual fund. Most of those funds crash and return to below average.