Most of us pick mutual funds like hormone driven high school kids. We just don’t realize that we’re drawn to the bad boy or girl--the hot ticket to fun. Many financial advisors and finance writers are much like our former knuckleheaded high school friends. “Oh, so hot!” they chime. “You’ve got to go for it.”

But what’s so “Bad Boy” about a hot mutual fund with a great track record? Plenty. Studies routinely demonstrate that you can’t pick winning mutual funds based on how they performed last month, last year, or over the past decade. Funds that win during one time period usually underperform the next.

Consider the SPIVA Persistence Scorecard. It measures whether the best performing actively managed funds can stay on top of the performance heap. According to SPIVA, most don’t.

Actually, “most” is an understatement. There were 682 U.S. stock market mutual funds among the top quartile of performers in March 2013. By March 2015, however, only 5.28 percent of them were still in the top quarter.
Many financial writers wish for one thing at Christmas: large numbers of readers with horrible memories. Take the article written by Business Insider’s Nick Levis, just four years ago. He boldly pumped “7 Mutual Funds To Buy.” None were stock market indexes. Instead, he promoted what bucked the evidence.
He picked funds with strong historical track records. I asked Russel Kinnel, Morningstar’s director of mutual fund research, what to look for when picking mutual funds that we hope will do well in the future. He said, “Low fees are the best predictor…so go with a low fee fund every time.” The funds with the lowest fees, of course, are indexes. That’s why Warren Buffett instructed his estate’s trustees to put his heirs’ proceeds into index funds when the Oracle dies.
Those following Nick Levis’ advice, however, are likely crying over milk. Since the article was published, on July 20th, 2011, the S&P 500 has beaten all seven of his recommendations. Investors splitting $10,000 evenly into each of the former hot tickets would have seen their money grow to $12,219 by November 14, 2015. By comparison, a $10,000 investment in Vanguard’s S&P 500 index fund would be worth 36 percent more. It would have grown to $16,625. That’s a massive difference over 52 months.

Vanguard’s S&P 500 (VFINX) vs. The Seven Fund Picks
July 20, 2011 to November 14, 2015

Vanguard's S&P 500 (VFINX) vs. The Seven Fund Picks

Academics call this “reversion to the mean.” Winning funds rarely continue to win. And when they disappoint, investors pay the price. The S&P 500 now has a better 5 year track record than each of Mr. Levis’ former hot funds. The index has also beaten every single one of them over the past ten years.

Vanguard’s S&P 500 (VFINX) vs. The Seven Fund Picks
10 Years Ending November 14, 2015

Vanguard's S&P 500 (VFINX) vs. The Seven Fund Picks

I don’t mean to pick on Mr. Levis. Excitement is a finance writer’s bread and butter. A Fortune magazine writer once said, “By day, we write about, ‘Six Funds to Buy NOW!’...By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don’t sell magazines.”

Steve Forbes, of Forbes magazine said, "You make more money selling advice than following it. It's one of the things we count on in the magazine business -- along with the short memory of our readers."
I chuckle at what Jason Zweig wrote, in his excellent book, Your Money And Your Brain. “The ancient Scythians discouraged frivolous prophecies by burning to death any soothsayer whose predictions failed to come true.” He added that investors might be better off if modern forms of divination were held to biblical standards.

Steve Forbes, of course, was right. He echoes what Warren Buffett once said. People will pay a lot more money to be entertained than they will to be educated. But education, when it comes to investing, is exactly what we need. Writing about money isn’t Star Wars, a SuperBowl game or The Amazing Race. It’s real. It affects people’s lives.

The best way to invest in mutual funds is to build a low cost portfolio of indexes. Forget about forecasts. Forget about the “Hot Funds To Buy Right Now!” Your money should follow logic. Ignore hot headlines—and raging hormones.

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat. fred