Most investors simply buy a fund that has been going fast , on the assumption that it will keep on going . And why not ??? Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes .
What's more , we know that some plumbers are far better than others , that some baseball players are much more likely to hit home runs , that our favorite restaurant serves consistently superior food and that smart kids get consistently good grades . Skill and brains and hard work are recognized , rewarded and consistently repeated all around us . So , if a fund beats the market , our intuition tells us expect it to keep right on outperforming .
Unfortunately , in the financial markets , luck is more important than skill . If a manager happens to be in the right corner of the market at just the right time , he will look brilliant but all too often , what was hot suddenly goes cold and the manager's IQ seems to shrivel .
This is yet another reminder that the market's hottest market sector that was technology often turns as cold as liquid nitrogen with blinding speed and utterly no warning and it is a reminder that buying funds based purely on their past performance in one of the stupidest things an investor can do .
But there is good news too . First of all , understanding why it is so hard to find a good fund will help you become a more intelligent investor . Second , while past performance is a poor predictor of future returns , there are other factors that you can use to increase your odds of finding a good fund .
Finally , a fund can offer excellent value even if it does not beat the market by providing an economical way to diversify your holdings and by freeing up your time for all the other things you would rather be doing than picking your own stocks .
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