By Richard Loth (
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Many investors tend to focus on a mutual fund's historical performance as oppsoed to considering its underlying portfolio characteristics. With individual investors, whether these are stock, bond, or fund investors, return is the holy grail of their approach to investing. However, while an investment's return is certainly an important consideration, it would be best to first start with looking at an investment's fundamentals. After all, strong, consistent investment qualities are what produce top-rated investment performance, not vice versa. (For more insight, read
The Truth Behind Mutual Fund Returns.)
With mutual fund investing, it is particularly important to look at all the components of investment quality and not just performance alone. There is too much hype and misleading information in mutual fund advertising. In this regard, the most abused metric in fund marketing materials is performance data.
The financial media continuously bombard us with what's "hot," be that a particular fund or fund category. The personal finance magazines are filled with eye-grabbing headlines about what to invest in now, next month and next year. The pervasive investment community habit of focusing on the short-term displaces investment fundamentals for big, immediate returns as selection criteria.
Too many mutual funds enjoy a very short period of success. The record books are full of superstars that disappear from one year to the next. Therefore, remember these two key points when considering fund performance as an investment quality:
- Top performance is the product of favorable indicators.
- To rely on performance figures, they need to be established over a relatively long period of time.
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