Dan Solin: Smart Investor Makeover: Picking Hot Mutual Funds and Other Fables (Video)

Published on: 30th June, 2009

Every day brokerage firms across the country recommend mutual funds to their clients.

Sometimes they make these recommendations based on Morningstar’s much hyped “star” ratings. They may also rely on the past performance of the fund or the fund manager.

It’s all an elaborate con.

One study showed that 5-star Morningstar rated funds actually underperformed the mutual fund averages in ensuing years.

The media reinforces the ability of “experts” to pick superior funds. Forbes has an annual “Honor Roll’ of mutual funds which it touts as being helpful to investors. Vanguard founder, John Bogle, examined the “Honor Roll” picks from 1974 to 1990. He found that “Honor Roll” funds significantly underperformed the markets during the period after their selection. The cumulative returns of the “Honor Roll” funds was 439.7% vs, 633.4% for index fund investors.

In this week’s video, which is entitled “No Stars,” I discuss the data you need to know to make informed decisions about mutual funds.

If I had thought more about the title, I would have called it “No Conscience.”