If a fund is performing very well, is it safe to bank on it's momentum the following year?

Question

Was thinking specifically about Indian, Chinese and European equity funds.

Would it be safe to say that nothing short of a serious market crash would be able to change the polarity of their ROIs?

Answer 1

Many of the best performing funds have attracted many new investors and lots of (read that as "too much new) cash. So much that the fund managers run out of "their best ideas" and must invest the new cash in not so great stocks. Some funds quickly close to new investors but keep open for current or 401k investors (soft close) or close to everyone (hard close) to prevent this problem of "asset bloat." Other funds, do not close as new money mean more profit with the fees they charge, resulting in the fund's results falling.

Answer 2

Let's rephrase the question. If someone tosses a coin and it comes up heads, is it fair to assume it will be heads again the next time ?

I think the answer is obvious, and it applies to your question as well. If you have no knowledge or opinion of how a certain track record is achieved, it is very difficult to draw a conclusion from past performance, unless it covers a long period.
Keep in mind that with 6 tosses of a coin there is a chance of 1 in 64 it came up heads every time. The same could be true with investment returns above the average. There are literally thousands of funds out there, so I am sure from the ones with good results there are plenty where it was just luck....

So if you want to rely on track record only, I would suggest to take at least 8 to 10 years. If you have an opinion about the quality of a fund and the direction they are taking, it can be different obviously.

Answer 3

In general, absolutely not. Momentum swings can almost always occur in less than a year, sometimes overnight. If you want to "bank" on something, bank on change being the norm. But you can also factor your Fund Manager track record into play, does this person have a history of being able to adjust to account for changing market conditions or is he / she a dinosaur too big and slow to adjust expediently ?

But to address your markets of concern more individually, each of those markets has promise but no guarantees. The methods of the Gurus I study involve getting yourself educated so you can decide well and adjust quickly yourself.

Look at the rules for your investments, can you change them cheaply and quickly at will ? Is there a tax consequence if you choose to do so ? etc . . .

I don't do funds anymore, because I like to be in control. Consider indexes instead. The DIA, QQQQ, OEX, and a whole host of smaller ones related to Sectors ( and even nations ) are now available for instant diversification and also for the ability to change quickly and cheaply whenever you want.

Answer 4

the stock market is unpredictable - just cause a stock does well one year one never knows what is going to happen the next year
you may want to take out your profits and leave the principal in

Answer 5

No.