How to pick a mutual fund.
You've seen the warning in mutual fund ads: "Past performance can not guarantee future performance." Yet, mutual funds tout their past performance, as do investment newsletters and magazines. It often is recommended that investors examine a five- or 10- year track record when choosing funds, but can that predict the likely future performance? Are winners more likely to repeat as winners, and losers as losers? The Institute of Certified Financial Planners recommends considering the following factors before making a choice:
* Consistency. Don't rely on one hot year. Today's winner easily can be tomorrow's loser. Those with good long-term track records may not always beat the market, but they are less likely to fall in the basement.
* Comparability. How does the fund compare, over the long run, with similar funds, with those whose focus is other types of assets (say, a stock fund vs. a bond fund), and with broad market benchmarks, such as the Standard & Poors 500?
* Is the portfolio manager who directed the fund's stellar performance still there? If not, the track record may be meaningless.
* Fund size. Investor money tends to pour into successful funds. However, if a fund made its success by buying stocks in a limited number of small companies, it may not be able to invest a flood of new money the way it once did.
* Fees and taxes. High expenses and taxes (due to portfolio turnover) significantly can eat away at returns. The...
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