What are the top rated, best performing investment mutual funds and stocks in 2011- 2012 Can we predict it?

Which all will be the best performing or top rated investment funds and stocks for 2011? Can we predict the future performance based on past performances? Can we trust the ranking of Wall Street journal, Morning star Mutual funds and other financial newsletters and invest our money? These are the questions I would like to answer in this article. Please leave your comments at the end of the article.

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Vanguard did a study of past performances for institutional investors. Their finding is quite interesting. Of the top-20 US equity funds during the 10-year period through 1993, only one stayed in the top 100 in the subsequent 10-year period. Bara, a world leader in research and risk management, undertook a study to find if the historical performances predict future performance. His conclusion was "There is no evidence on persistance of equity fund performance".

Believe it!! Past performance is no guarantee of future performance
Believe it!! Past performance is no guarantee of future performance

One great example for this is The Grand Prix Fund. It was ranked in top 1% in fund returns for 1998 and 1999. It finished in the bottom 1% for years 2000 - 2001.

Of the 50 top -performing funds in 2000, not a single one appeared on the top-50 list either in 1999 or 1998.

Believe it!! Past performance is no guarantee of future performance. History will repeat itself, is a common phrase, but it cannot be maintained  in the world of financial investments. It has its own rules.

Best and Worst Asset Classes 1995- 2004

Year
Best
Worst
1995
Large Caps
International
1996
Large Caps
Bonds
1997
Large Caps
International
1998
Large Caps
Small-cap Value
1999
Small-Cap Growth
Small-cap Value
2000
Small-cap Value
Small-Cap Growth
2001
Small-cap Value
International
2002
Bonds
Small-Cap Growth
2003
Small-Cap Growth
Bonds
2004
Small-cap Value
Bonds
Large Caps = S&P 500 index Small-Cap Growth = Rusell 2000 Growth index Small-Cap Value = Rusell 2000 Value index

As you can see from the table above, asset class performance fails to persist beyond a few years. Same is the case of Mutual Funds. Past performance cannot be used to predict the future performance.

Look at some of these funds

  • 44 Wall Street Fund - was the top-performing US diversified stock fund during the 1970's and attracted thousands of eager investors as its fame spread. Unfortunately for these performance chasers, this fund turned into the worst -performing mutual fund during the 1980's.
  • The Grand Prix Fund ranked in the top 1 percent in fund returns for 1998 and 1999. It finished in the bottom 1percent for years 2000 - 2001

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Poll for fun

Do you believe in Buy-And-Hold strategy?

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Market Timing and Financial news letters

We get lots of financial newsletters (some even for free) with financial predictions for the next year. Best stocks to invest, best mutual funds for 2010. Let's face it: these newsletter publishers are businesses, making money by selling those newsletters, or getting revenue from advertising. Common sense tells us that if they really know the secret formula to make money in markets, they would be using it themselves rather than spending time with the keyboard, pondering what to write.

Do you know about Doug Fabian? He is a famous newsletter writer. He made a financial prediction in 2003 and invested (publicly) $500,000 of his own money. Big mistake!! He lost $192,000 and he did admit it in his newsletter. He wrote: "It was worth it". I hope your lessons about investing will be much less expensive. -Sorry Doug!

Do you know that Wall $treet pumps millions of dollars to financial media? They both need each other. The latter needs readers, viewers and listeners and Wall street also need readers and most of all: YOUR dollars.

Winning strategy

Let me first quote some of the winners in the field

Warren Buffet (I guess you know who he is)- "Inactivity strikes us as intellegent behavior"

Rick Ferri (author) - "Write down your strategy -then stay the course"

Frank Armstrong - "Buy and hold is a very dull strategy. It has only one little advantage - it works, very profitably and very consistantly.

Pat Dorsey (director, Morningstar stock analysis) - " Market-timing is bunk."

Wall Street can't stand buy-and-hold strategies because brokers need trading activity to make money. They have a billion dollar marketing machine to seduce us to sell. When emotions run high, logic flies out and we buy high and sell low. Motivated by greed, investors listen to any sales pitch promoting a perceived can't -lose strategy or a 'hot fund'.

A text book for investing basics

Buy-And-Hold Investing versus active trading

Trading Strategy
Turnover
Returns
Most Active Trader
258%
11.4%
Average Trader
76%
16.4%
Buy and Hold
2%
18.5%
As you can see, Buy-And-Hold Strategy has the greatest return. Turnover - (a measure of buying and selling activity in an year) Source: Bogleheads

STAY THE COURSE

The logical alternative to performance chasing and market timing is structuring a long-term asset allocation plan and staying the course. Sticking to your plan is hard sometimes. It takes knowledge and confidence: Knowledge to prepare a sound strategy and confidence to know our strategy works, if you simply give it time by staying the course.

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up , then sell it. If it don't go up , don't buy it" - Will Rogers

Inactivity strikes us as intelligent behavior - Warren Buffet
Inactivity strikes us as intelligent behavior - Warren Buffet | Source

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