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Last Month's Leaders Can Be Long-Term Winners

They've weathered recent turmoil and have great prospects, too.

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At Morningstar, we're long-term investors, and we encourage you to be as well. But even we get a little guilty pleasure out of mutual funds' short-term performance. Sometimes looking at the short-term leaders' and laggards' boards can even be informative.

That's particularly true when markets are behaving badly--as they have been over about the past month. In general, market indexes peaked around mid-July--and have been bouncing around since then. One day, worries about the subprime mess and its ripple effects will send stocks and high-yield bonds (in particular) reeling. Other days, confidence in the Federal Reserve or other parts of the economy will buoy stocks. All told, the S&P 500 Index is off 7.97% over the past four weeks through Aug. 14, 2007. The Nasdaq Composite has fallen 7.68%. Broad foreign market indexes are generally down between 5.50% and 9%.

The best performers over the past month, not surprisingly, have been those that deliberately bet against the market, primarily bear-market funds. These funds are acting exactly as we would expect them to. While their strength during turmoil may be enticing, we don't suggest investors get out their checkbooks. After all, if you truly doubt that the stock market will rise over the long term, it's better to just be out of it completely or concentrate your stake to a small part of your overall portfolio in a conservative value fund and put the rest in fixed income or other choices. For long-term investors, we just don't think bear-market funds are a necessary part of a diversified portfolio.

Bridget B. Hughes does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.