High Return Funds – Only Time Will Tell

Been browsing through newspapers and magazines lately, stopping at any article related to making wise investments. There was an article on identifying high return funds that caught my attention. Being a layman in picking the right investment funds, it certainly gave me better understanding in how to judge the performances of funds.

Many of us had seen the following disclaimer under investment performance charts, “Performance data quoted represents past performance and does not guarantee future results.” True enough, while we are busy looking for mutual funds that we believe will do better than the market as a whole, finding funds that do really well is going to be easy. While there appears to be some relative fluctuations, certain funds are clearly ahead on average. Funds with poor records often go out of business, and soon forgotten.

However, how can we know if a fund will dissolve over the next few years. If we only look at funds that are alive today to calculate past returns we are using information nobody in the past had. Thus a certain inaccurate and bias analysis is formed, one with returns that are higher than you can expect to earn.

When analyzing a strategy for selecting stocks, mutual funds, or any other investment we should look at how it would have performed in real time. That means you cannot test it simply on the securities that exist today but must instead test any investment strategy on the securities that existed at the time it might have been used. If you want to test a mutual fund strategy that means you need to go back and try it out on the funds that existed in each period you might have wanted to use it in the past.

While the average return over a five year period may be extremely good relative to the overall market’s, it lags over the last ten or fifteen year periods, therefore making long term results are more reliable. Unless a particular strategy generates simply spectacular returns it is difficult to distinguish its returns from luck over any relatively short period of time. Thus the right conclusion to be drawn is that the average mutual fund has historically produced lower returns than a passive index fund.


“Time is a great teacher, but unfortunately it kills all its pupils.”
– Hector Louis Berlioz