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Even Long-Term Past Performance Fails as a Fund Selector - Update!

 While many investors and financial publications alike gravitate towards funds with a recent hot past - like last year - investment professionals prefer to look at the consistency of long-term past performance.  But is long-term past performance any better at predicting future mutual fund success?  I have been researching the answer since 1997.

 I have examined the in-category performance of every equity mutual fund in every category during consecutive 5-year periods.  The first survey looked at the returns of the period 1988-1992 with the follow up performance of 1993-1997.  Since then, I have conducted ten such surveys.  The conclusion — long-term past performance is terrible at predicting future fund success!

Not trying to be too demanding, I only asked top quartile funds from the first period to repeat top quartile performance in the second period.  Combining all ten surveys, I found that only 21% of the top quartile funds of the first 5-year period turned in top quartile results in the following 5-year period, but 34% turned in bottom quartile follow results!  The top half/bottom half ratio was 43/57.  Coin tosses produce similar outcomes! 

I also examined the bottom quartile performing funds.  It turned out that bottom quartile funds from the first period delivered more top quartile performers in the follow period.  Bottom dwellers produced top performers 27% of the time, and had a top half/bottom half ratio of 50/50.  

In all of my research, past performance has yet to prove itself as even a modest predictor of future fund performance.  Are you sure you want to keep listening to wholesalers promote  their top fund’s long-term performance?



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