Managed mutual funds need consistency

When it comes to using managed mutual funds, it’s important to pick great merchandise.

No fund management is going to be great every year, but it should have a steady record of good performance net to the investor over the last five to 10 years.

There is an added layer of risk because there are management risks. Just because the fund has been great in the past does not mean it will be great in the future.

You also have the risk of what’s called style drift. That’s when you choose a fund, for example, because it buys large cap value stocks but then it starts to drift into other areas. All of sudden you’ve got a stock fund that wasn’t really what you had intended to buy to begin with. Or you had a fund that had great performance and then the last three years it’s been poor and you haven’t even realized it. It seems like then you can’t ever get ahead.

Most mutual funds are mediocre or poor because of the internal expense ratios and everything that goes into how they’re regulated. However, the best ones can be very effective.

There are different definitions of how we define great, but it should have a great track record for sure. It’s critically important to watch these funds like a hawk and manage risks. I’m not recommending you only do index investing. My feeling is why not do both. There are merits to managed mutual funds, and there are merits to index funds. You have to pick great investments.