Bad Ways to Pick a Mutual Fund; For Starters, Focusing on Ratings and Past Performance
Investors have shoveled almost $14 trillion into U.S. mutual funds, but a good chunk of that money is riding on mistaken assumptions.</br></br>Example: buying a fund based primarily on past performance, the most frequently cited factor in choosing funds (by 47% of investors), according to a report from research and consulting firm Cerulli Associates.</br></br>Apparently, the familiar refrain that "past performance is no indicator of future results" isn't top of mind when we decide where to invest our hard-earned money. You can't really blame investors. Historical returns are trumpeted in advertising and fund disclosures, and past results are a reasonable guide in our own day-to-day experiences.</br></br>Indeed, when choosing a fund "one of the few things you're given is past performance," says Shlomo Benartzi, a UCLA professor and chief behavioral economist at Allianz. "And, after you experienced so many things in your life where past performance will tell you a lot about what will happen, we're now asking you to take the most salient available information you have and ignore that."</br></br>The good news is that more investors appear to be cost-conscious. "The cost of the fund" was the second most commonly cited factor in choosing a fund (42% of investors), says the Cerulli report. "The message is getting out there that we cannot control performance, but we can certainly control costs," says George Papadopoulos, a financial planner in Novi, Mich., a Detroit suburb.