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Don't Buy Top Ranked Funds

We've said it before, and we'll say it again: when shopping for mutual funds, resist the urge to purchase top performers.

Given the scads of mutual funds out there, investors might be tempted to turn to the want ads rather than sort through heaps of funds in hopes of finding a good match. More often, befuddled investors depend on fund rankings to bring a cool empirical eye to their search. But those who invest solely based on rankings risk disappointment.

'Using historical top quartiles to predict top quartile performance is a bit like rolling the dice,' said Srikant Dash, an index strategist at Standard & Poor’s Corp. S&P found in a recent study that few funds that ranked among the top quarter or even top half of their peers managed to consistently maintain their performance.

In the past five years, only 13.2 percent of large-cap funds, 9.9 percent of mid-cap funds and 10 percent of small-cap funds were able to remain ranked among the top half of funds for the entire period.

The top 25 percent ranking proved even more daunting a challenge, with only 3 percent of large-cap and 2.5 percent of mid-cap funds staying in that zone for five straight years. Stats for small-cap funds were even more grim: None was able to hold onto a top 25 percent ranking for the entire period.

'The numbers are similar to what would happen if you just pick a fund randomly,'" Dash said.


Buying the funds at the top of this year's performance chart is step one of the all-to-common buy-high/sell-low cycle that is probably responsible for destroying more fund investor wealth than loads, high fees, and manager ineptitude combined (step two is selling that fund after its almost inevitable subsequent poor performance).

International Underdogs

Morningstar's Fund Spy lists three quality international funds that had a tough 2006 but that their analysts think will perform well going forward:

Today, we'll take a closer look at three such laggards that we think continue to be superior offerings, as their proven long-term concepts and people remain in place and their outlook for future success is positive."

Their picks are:

MAXfunds gives UMB Scout International a MAXrating of 82, the Mainstay ICAP International Fund a MAXrating of 88, and Masters Select International Fund a MAXrating of 69. Master International is currently closed to new investors. For a list of our highest rated International funds, click here.


MAXadvisor Powerfund Portfolios Update

Note to subscribers of the MAXadvisor Powerfund Portfolios: this month's portfolio performance data update and commentary has been posted. Subscribers can log in by clicking here.

The MAXadvisor Powerfund Portfolios is a collection of seven model mutual fund portfolios ranging in risk from very safe to quite aggressive. Each portfolio is made up of a group of terrific, no-load, low-cost mutual funds that are carefully chosen to work together to lower volatility and increase returns. You can learn more about the MAXadvisor Powerfund Portfolios (and sign up for a free trial if you like what you see) by clicking here.

february 2007 performance review

Gulp. In our portfolio commentary from just four weeks ago, we said that "the market continues its heady ascent," and "if this keeps up unabated, it probably won’t end well.” A few days later, the Dow plummeted more than 500 points in just a few hours before partially recovering later in the day. After climbing back, it took another 250 point drop this past week. Nevertheless, due to big gains earlier in the year, the Dow is only down about 2%. The S&P 500, Nasdaq, and Russell 2000 (small cap index) are also all down for the year.

Ask MAX: What does MAX think of the Vanguard Target Retirement Fund?

03/16/07 - Vanguard

Ken from St. Louis asks:

I am 26 and am staring an investment portfolio with $6,000. What do you think about Vanguard's Target Retirement 2045 Fund?"

Despite the fact that it sounds to us more like the title of Arnold Schwarzenegger's last movie than a mutual fund (YOU'RE TERMINATED AARP!), for a guy in your footloose-and-fancy-free shoes, we think Vanguard's Target Retirement 2045 Fund (VTIVX) is not a half-bad way to go.

Vanguard currently has six Target Retirement funds, ranging from the Target 2045 for investors who aren't planning on hanging it up for forty years or so, to the Vanguard Target Retirement Income Fund Summary, which is for those who are currently retired.

The idea behind the Target Retirement funds is that the funds adjust their allocation as you grow older. A young whippersnapper like you buys the fund today and your money is invested in a decidedly growth-focused 88% stocks and 12% bonds. In the next forty years, the fund's manager slowly lowers your equity allocation and increases your bond allocation. If you stuck with the fund for the long haul, by the time you reach your 'target retirement' date your investment’s allocation would flip to an income-focused 30% stocks and 70% bonds. A few years after retirement, the fund will resemble the Vanguard Target Retirement Income.

Mutual Fund March Madness

Chuck Jaffe at Marketwatch gives investors something to do during lulls in this year's NCAA Tournament:

See if your holdings have earned their way to your personal "Big Dance." When you find a fund that is "on the bubble" -- meaning it's not an obvious choice to buy again today -- you'll have a "watch list" of funds that may, in time, deserve the boot.

The conference the fund plays in. In hoops, there are "power conferences" -- where a 6th-place team might make the tournament -- and "midmajor conferences," where only the tournament champion goes. In mutual funds, there are asset classes. Your search for a fund should start by deciding the type of assets you want to own.

Conference record. In basketball, it's important to be in the top half of your league. In mutual funds, it's about being consistently in the top half of the fund's peer group, and being in the top one-third over longer time periods.

Quality wins. This is the NCAA's way of saying that you beat good opponents, and a mutual fund's way of showing that it performed well in tough times.

Strength of schedule. In basketball, you want to play tough opponents rather than cupcakes. In mutual funds, it's not a bad idea to favor a fund that has results over a lot of time periods so that you can judge it based on everything from the last quarter to the last decade or more.

Power rankings. In basketball, this is the computer's attempt to suggest that one team is better than another; in mutual funds, it's star ratings, numerical rankings and more."