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FT4Web by Investors FastTrack
Buy and Hold
Keep your eyes on the road
Traveling to your investment goals is much like driving your car. While you can hold the steering in a fixed position for a short period, eventually, you need to adjust. You must refine your investment steering regularly or your journey will likely end poorly.
Many Investors DO NOT know the Current Situation
When reading a current magazine article, you never know if those great ideas are ancient history, happening now, still in the future, or just plain wrong. Use FastTrack for perspective. What are the salient characteristics that have the author so enthused. Many articles are written by fresh-out-of-college English majors. They steer you in the wrong direction because they've never been there themselves.
This italicized comment is written in mid2014. Morningstar has changed their ranking system several times. So take this lesson as a simple training exercise, and redo the analysis yourself. The techniques still work quite well.
As of 1999
There are many published fund ranking systems. Magazines are filled with them. Most prominent is the Morningstar ranking system of 1-5 stars. What you should know is that this system doesn't work. This is no surprise since Morningstar themselves disclaim its predictive power . . . while encouraging funds to advertise their Morningstar ratings (and their Morningstar name).
What Doesn't Work
What you'll notice is that Morningstar top-ranked funds under perform while having a high correlation (Cor=98%) to the average Growth fund. Every Morningstar ranking repeats this pattern until December 1997, at which point, Morningstar dramatically changed their ranking system. (More on the change a couple of paragraphs down).
The Lower R chart (Relative Strength) shows:
If you were to hold 5 to 10 growth funds at random, you would expect to beat the Morningstar averages. BUT if you were to pick only one or two funds, then selecting from the Morningstar suggestions would reduce risk ensuring that you would not be picking one of the few funds that are poorly managed.
Unfair! The Growth AVG no longer includes the real DOG funds that have been liquidated or merged!
While this is true, the Morningstar 1994 family has the same advantage. It's real losers have met a similar fate. It is unlikely that "discontinued" funds are a factor.
Foretelling the future?
This is an imprecise science, but there are rules: