Should I invest in short term or long term mutual funds?

Question

Most articles I found on the net suggest to focus on the long term performance (>=5 yrs) when picking mutual funds. I wonder why isn't it good idea to always maintain the top 10 funds over the 12 months in my porfolio ? Let say Fund ABC has returns of 10%, 10%, 20%, 10%, 50% in past 5 years (20% annually) and Fund XYZ which has 25% annual return for 5 yrs period but only 10% return last year

My arguments are

1) Good performance in the past 5 yrs does not mean the fund will continue for the next 5 yrs, and

2) Funds that have been on the top 10 in last 6-12 mths are likely to continue to provide good return for the next 6-12 mths. Fund ABC will likely to have 30%-40% next year. Even if it doesn't, if I pick top 10 funds with such returns, their average return for next year will likely be in that range

If I keep updating my porfolio every year for 5 years, my return will be 30-40% annually. If I invest in fund XYZ my return will stay at 25%).

So why not?

I know the assumptions for my example are simplistic, but they're just to illustrate my thoughts.

Answer 1

Good thinking. The essence of good long-term investing is diversification. Choose some that have done well for a long time, because they will likely be around for a long time. And choose some that have been doing great recently, because although they may be more risky, they will probably provide a higher return over the short term.

Whatever you do, have fun. It's only money.

Best of success.

Answer 2

The reason you wan to look at the longest performance period possible is to minimize the effect of luck. Any manager (or monkey, for that matter) can get lucky one year and generate an enormous return. That doesn't mean he's good, just lucky. If a manager generates enormous return for 5-10 years, it's much less likely it was because of luck. You'd be surprised how much luck enters into the stock market, but as time goes by, skill becomes more and more important.

There have been studies conducted on exactly the strategy you proposed. Almost every single one shows that the funds that do best one year underperform the next.

In any given time period, the funds that do best are extremely focused one sector, like gold, oil, tech, biotech, Russia, etc. Have you ever heard of a business cycle? After a sector goes up for a time, it goes back down. The faster it went up, the faster it goes down. For example, two years ago, from the second half of 2004 to the middle of 2005, the home builder industry did excellent. It then dropped enormously. Oil stocks did excellent last year, then tanked this year, but seem to be going back up a little.

Yes, you can time sectors somewhat, but blindly buying the funds that are up the most in any given time period is a recipe for disaster. The best mutual funds in 1998- early 2000 were by far tech funds, which dropped 80-90% in 2000 alone.

Timing mutual funds, sectors, and the stock market is definitely possible, but it's not nearly as simple as you think. For the average amateur investor, who is not willing to learn as much as he or she can about he stock market, simple buy and hold is best. Nothing that obvious in the stock market works that well.

Answer 3

always invest long term for one if you hold it a year you will have a better tax advantage as to holding it for six months. Now the funds that hit say 50% in year five you have to look back and see why. 9/11 just happened and the market came down hard but once we got going to seek the Taliaban the market rallied. Tech had a nice rally this year (and it should come to an end after the first quarter next year) housing and health care got SLAUGHTERED and even the commodities are taking a nose dive. Asian sectors are hot right now as is emerging markets so its not too late there especially after a minor correction today. Oil may rally next year (and I expect it to) finanical sector was weak at first then got stronger as the year went on.

The point I'm trying to make here is so what what abc fund did in six months the emerging markets could cool down to an iceberg next year and a lot of investors could lose their shirts. Which is why you look at the five year performers even better would be 10 year so you see how bad they were when the dot.com bubble burst and the market tanked. and thus the reason I listed above is why you change your portfolio every so often (18 months preferably) I changed mine twice this year already and looking to change it again next week maybe or keep it the same and change it next year in the mid first quarter (which is probable)

Kepp reading you are learning.

Answer 4

from time to time a mutual fund could be set for a distinctive term on the onset of the fund. As that funds nears the liquidation element for the final 3 hundred and sixty 5 days it could be a quick term fund. on account that maximum businesses enable an investor to purchase in or sell out at short observe there is not any genuine disadvantage to an prolonged term fund.