Past performance has never been, and will never be, a reliable guide to how well a fund will do in the future. Yet investors can't resist big returns.
International stocks have trounced the S&P 500 by an average of nine percentage points a year since 2002. Sure enough, this past January investors poured $10 billion into foreign-stock mutual funds, vs. just $5 billion into U.S. stock funds.
"Investors tend to take notice of a fund once it's had a high return," says David Silva, editor of Morningstar.com. Trouble is, a hot streak might run for several years, but at some point you'll likely encounter a dramatic blowup, or at least far smaller gains once returns go back to normal (which you can count on).
And popularity has a price: The more money that flows into a fund, the harder it becomes for the manager to react quickly to market changes, making it even more likely that the returns will sag in the near future.
Buying hot performers
| After years of scandal and dismal returns, the fund group is on the rebound. Now let's see if it can last. (more) Do you want to retire rich? Build wealth? Money Magazine's ideas for five grand can help you reach your goals. (more) Though the stock market is at record highs, value investors still have opportunities. (more) |
