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Rekenthaler Report

Kick the Dogs

It doesn't pay to be patient with losers.

Saturday's Wall Street Journal carried an article called "Why the Top Funds Tumble" (no link, firewall), about the inability of winning mutual funds to repeat. The data were limited--a single five-year period, for large-company United States stock funds only--but the conclusion is inarguable: Most highly successful funds will not be highly successful in the future. Perhaps not even moderately successful. This precept holds true regardless of time period or investment category. There's not much value to selecting a top-performing fund at random.

There may, however, be value in avoiding the bottom-performing funds. Although the winning funds in the study did not show persistence, the losers did. Almost half the funds that had bottom-quartile performance during the first time period either landed in the bottom quartile during the next five years or ceased to exist.