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Across My Desk: Using Past Performance

We all know the primary reason to invest in mutual funds is for the money. But, with over 10,000 equity funds to select from, picking out a few funds to invest in is challenging. One popular way to ease that selection process is to choose funds based upon their past performance. Using past performance as the only criteria in selecting a fund investment, however, isn't always wise.

Lipper addressed the past performance subject in a recent Lipper Fund Industry Insight Report. What follows are three reasons why using excellent past performance as the only criterion to choose a fund may be undependable:

  • For some funds the past performance pattern will persist for just three months; in other cases the performance pattern will persist for 12 months or possibly more.

  • In all cases performance patterns persist only for as long as the style, sector or classification continues to perform well, e.g., if value funds have done well for the last 12 months and then do well for the next 12 months, using excellent past performance is a good way to screen funds.

  • If the sector performance pattern does not persist, then that excellent fund could drop to the bottom of the pack in the next 12 months.

My advice: Using a fund's long-term past performance---as in how it's done over the last 1,2,3, 5, 10 and 15 years---will provide an idea of how that fund has done through various market cycles. Then compare that fund's past performance data with how other funds--- with the same investment objective--- have performed over those same time periods. You'll find that data under the weekly Investment Objection Performance updates on the homepage of this site.

To read more articles, please visit the column archive.

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