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Author: brucedoe | Date: 1/15/05 11:44 AM | Number: 11607
Actually, there is a tendency for a real good year in a mutual fund to be followed by a good year. An example might be the Russell 2000 which had a nice year last year after a blowout year the year before.


All the data I have show that the more years in a row that a fund has beaten the S&P 500, the less likely it will do so in the next year.

Burton Malkiel writes about this in 'A Random Walk Down Wall Street'. Here are some quotes from his book:

Page 393
"I have tested a strategy whereby at the start of each year investors would rank all general equity funds based on the funds records over the past 12 months. In an alternative strategies, I have assumed that the investor buys the top 10 funds, the top 20 funds, and so on. Each year the investor would switch to the top funds from the preceeding year. ... The results did show above average performance during the 1970s. During the 1980s and in the early 1990s, however, the strategy produced returns not only below the mutual fund average, but also below the S&P 500 Stock Index. Similar analyses showed the same results when funds were ranked by their last two year, five year, and ten year records."

He went on to test other similar strategies, such as choosing the funds rated 'best' by Forbes magazine and other leading publications.

"The clear implication of these tests in the laboratory of fund performance, as well as the academic work reported in Part Two of this book, is that you cannot depend on an excellent record of any particular manager continuing persistantly in the future."

I can produce numerous similar passages from other noted financial authors, that all say that there is little if any persistance from one year to the next with regards to fund performance.

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