A bunch of new exchange-traded funds (ETFs) and mutual fund announcements have come across my desk lately. One was for the Guinness Atkinson Renminbi Yuan & Bond Fund (GARBX), a bet on China's currency. There's also the First Trust NASDAQ CEA Smartphone Index (FONE), an ETF that invests in smart phone makers. ProShares Hedge Replication ETF (HDG) provides exposure to hedge funds. And here's one for those of you who like fishing: Global X Fishing Industry ETF (FISN). I don't know how the ETF will perform, but you've got to love that ticker.
Some of these new funds are ridiculous. Most of them are marketing ploys by financial firms to lure more money from investors. Companies love to launch and promote "new and improved" products. Every year, Frito Lay comes out with a bunch of new flavors of Doritos chips. M&M now makes its chocolate candies with pretzels inside. Some new products catch on, but many newfangled ideas flop. Remember New Coke? That was a classic flop.
[In Pictures: 6 Numbers Every Investor Should Follow.]
Television networks also play this game. Every year, a network may launch 10 new shows with the hope that at least one of them is successful. That's OK, because the worst thing that can happen is wasting a half an hour or hour of your time watching a bad show.
It's a totally different story with your investments. If you invest in a new gimmicky fund and lose money, those losses can compound over time. That can make a big difference and hurt your investment returns.
One of my key investing philosophies is focusing on fund managers that have consistent returns over time. We look for fund managers we believe will generate performance that will put them in top 20 or 25 percent of all funds over the next five years. I'm never lucky enough to recommend the best fund at any particular time, but if we find managers who can beat their indexes and category peers with consistent performances, that provides the potential for nice returns over time.
[See Why There's a Disconnect Between Stocks and the Economy.]
We've all heard the disclaimer every fund is required to include in its prospectus: Past performance is not an indicator of future results. But if a fund has achieved stellar returns year after year, that performance tends to perpetuate itself. Unless the manager leaves or changes the fund's strategy, stellar funds can continue to outperform their peers for many years. That's why we recommend staying with tried-and-true funds. Let someone else gamble his money on the latest and greatest new fund or ETF.
Another way to think of this is the annual NFL draft. It turns out that a vast majority of the most highly-rated college quarterbacks don't succeed in the NFL. Occasionally, there will be a rookie who shines. But for every over-hyped rookie quarterback, there's a proven veteran who has a great record.
Those veterans—and the proven fund managers—are the ones to bet on. But, if you're set on buying a new and specialized mutual fund or ETF, think of it as the cherry atop a sundae, not the ice cream or whipped cream. It's only between 3 and 5 percent of your portfolio. That way, if it tanks, you won't lose a substantial amount of money and drag your portfolio down with it.
[See 50 Best Funds for the Everyday Investor.]
I know there's not much exciting about investing in the best mutual fund managers. Our method certainly doesn't have the sparkle of some of the newest funds and ETFs coming out. But we have found that investing in tried-and-true funds is the best way to get higher returns over time.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.
Reader Comments Read all comments (16)
BOON! 11:50AM August 07, 2011
BOON! 11:27AM August 07, 2011
Reginald Bold Esq. of NY 12:39AM August 07, 2011