One of my newsletter readers had an interesting question. He asked:

“One of the most commonly used and maybe the best advice is to look at the 1,3,5 year perfomance and the rating among peers. Then why don’t the funds at the bottom lose all potential new customers and all the owners sell? Are there some hidden factors?”

Well, the hidden factor is that most investors don’t necessarily care about 3 and 5-year performance numbers, and I don’t either. I look at far more recent data since the economy is constantly changing and different criteria apply now as opposed to 3 or 5 years ago.

The rating among peers is, well, overrated. If you look back 5 years, you would find yourself in the depth of the last bear market. Using the peer rating, would you then have selected a fund that, say, only lost 20% while the peers lost 23%?

I don’t think so. The idea is to avoid bear markets altogether and only move back into the market once an uptrend has been established. Then you can select funds that are in tune with market momentum and current economic conditions.