I always remind my Minnesota stock market investor clients of something that they read all the time. Most company 401(k) retirement plan participants never take the time to understand what they read.
The phrase “past performance is no guarantee of future results” can be found on just about every investment performance document and website that can be found. That language is there for a very good reason.
Historical investment returns are as much detail as individual company 401(k) retirement plan participants ever use to pick one company 401(k) retirement plan option over another.
I give my clients three important things to think about when it comes times to pick individual stock market mutual funds.
First, I remind them about how they drive their car. Occasionally, you need to look in the rear view mirror. But the majority of time you need to drive your car looking through the windshield at what is happening in front of you.
The same goes with buying mutual funds. It is much more important to focus on current economic, political, and stock markets events. Past investment performance does not do you much good in the future.
Second, owning mutual funds from more than one mutual fund company does not mean that you are diversified. Historically, all stock market mutual fund types move largely in the same direction at largely the same time.
Stocks are stocks. Bonds are bonds. Falling stock prices and rising interest rates will take their toll on each at some time. It is very important to know the difference.
Third, be especially careful about mutual fund ratings. By far the biggest mistake I have seen individual stock market investors make has been with the five star ratings from Morningstar.
The same caution can be said of investment magazines, web sites, and investment advice newsletters. No system is foolproof.
Mutual fund rating systems are largely based on past investment performance. But that rating system is not going to keep the mutual fund from falling in value when the stock market declines.
Past performance is no guarantee of future results. All mutual fund rating systems will fail when the economy and stock market environments decline.
Ric Lager
Lager & Company, Inc.
