Actually I pay very little attention to past performance. I invest by asset classes, so each mutual fund always invests in a certain asset class, such as Small-cap Value stocks. What is important is having a low cost of operating the fund, which includes the annual expense ratio and the transactional costs. Having a low cost gives one the best chance of achieving good future performance.

Roger

Is past performance one of several factors to be taken into consideration when choosing a mutual fund or completely irrelevant? While I can see how a stellar past performance is no guarantee of future results, can you also afford to ignore a dismal performance record?

You are correct that there is a difference between sales charges and annual expenses for mutual funds. If someone is clueless and needs help in choosing a mutual fund, then it may be sensible to pay a stockbroker a commission to help you get started.

But no knowledgeable investor needs to pay a sales commission to buy an open-ended mutual fund. This includes B shares which are sometimes mistakenly thought of as “without commission.”

The idea that you can find a mutual fund that WILL outperform its respective index has not been supported by any evidence that I’m aware of. On the other hand, it is quite easy to identify the mutual funds that HAVE outperformed. But you cannot buy past performance, and there is no statistical evidence of persistence of outperformance. Various markets have been studied including US and international markets, large and small cap stocks. The story is the same each time the analysis is done properly.

In the long run and on average all actively mutual funds MUST underperform their indexes because of additional costs. It’s a question of arithmetic, not rocket science.

In the short run, from time to time, some actively managed mutual funds will outperform their indices. You will then see plenty of advertisements trumpeting how well certain mutual funds have done. Do not believe these ads.

“Past performance is no guarantee of future results.” The SEC makes mutual fund companies say this, because it is true.

Roger

How can you say that all actively managed funds charge high fees and have high-expense ratios? If I understand this concept correctly, you can buy no-load funds. In addition, you should look for funds with low expense ratios, i.e. TIAA CREF has an expense ratio of 1.5 which is considered very low. Why not include some high-performing funds in your portfolio and the rest in index funds? In other words, why throw out the baby with the bath water?

Another question: does the research which shows that Index funds outperform actively managed funds only refer to funds indexed to the S&P 500? Or does it also apply to funds indexed to the Russell 2000 and the NASDAQ, for example? Please reply.