Investing For Beginners – Free Investment Articles and Tutorials

It doesn’t matter which web site you frequent, which publication you read, or what commentator you most admire. Odds are, the barrage of terms–best, greatest, top, favorite and select–all play on our desire for wealth and our need to win.

Smart investors may check the leader boards out of curiosity. But they also understand why they should avoid investing in a chart-topper. Here are five key reasons NOT to act on top ten recommendations:


1.) Top Ten Lists Encourage Short-Term Performace-Chasing. Most, if not all, top performers will not repeat in the following year. For example, none of the 1998 Mutual Funds Magazine leaders show up again in 1999. And in many cases, the best fall below their peer group averages. (For example, latecomers to the Janus Twenty party lost 4.25% in the 2nd quarter while the average growth fund earned 7.07% — an eleven percentage point swing!)

2.) Top Ten Lists Hurt the Funds They Highlight. When tens of thousands of investors flood one particular fund, it is difficult for the manager to put all of the new money to work. In fact, managers must stick to the large- caps, which may not be the fund’s objective, or they must settle on scores of small company issues, leading to overdiversification. Performance suffers.

3.) Investors Begin To Feel They “Need” the Top Performer. An investor with $50,000 can do just fine with 5 mutual funds–large-cap growth, large-cap value, mid-cap growth, small-cap, and international. Yet reviewing a Top Ten List is likely to encourage a “must-have” attitude where buying every recommended fund becomes an obsession. Pretty soon you have overlap, overdiversification, and twenty-eight funds that are hard to monitor.

4.) Top Ten Funds Hold Similar Stocks form the Same Sectors. This year’s leaders from July 1, 1998 to June 30, 1999 included the Internet Fund, Amerindo Technology, and Firsthand Tech Innovators. It doesn’t take much analysis to determine that these funds all have the same objective; they are Science and Technology funds. Purchasing more than one of these is equivalent to purchasing the same fund twice and overexposing oneself to technology.

5.) One Good Quarter (Even One Good Year) Does Not A Great Fund Make. Take Matthews Pacific Tiger Fund (MAPTX) with its 60.23% 2nd quarter and 99.20% return for the year July 1, 1998 through June 30, 1999. Sure, it sounds exciting to nearly double your money on an Asian exploration. Then again, the region was badly battered in the three year period from July 1, 1996 to June 30, 1999. So bad, in fact, that MAPTX annualized at -1.3% for that time frame. Could you imagine actually losing money in this amazing late 90′s bull market?

Don’t be fooled by the tv media, the print media or the bag of tea leaves. Top Ten Lists can steer you down a treacherous path.

On the other hand, identifying funds that you should never buy and/or definitely sell is very fruitful. Why? Because bottom-dwelling lemon funds rarely climb out from under their rocks. I say… DO AWAY with lemons entirely.

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