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Topnotch Funds That Investors Have Used Well

Investor returns have outpaced total returns for a handful of analyst favorites.

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Here's a little experiment that can help you figure out what kind of investor you are. Let's say you're talking with two friends one day and the subject turns to mutual funds. One friend brags about how a fund he owns has been delivering stellar, market-beating returns for years and invites you to get on board the gravy train. The second friend, looking sullen, gripes about how his fund has been a lackluster performer ever since he bought it and urges you to steer clear. To which friend's comments do you pay more attention?

If you're like most people, you'd probably focus on what the first friend says. It's only human nature to want in on a good thing, especially if it might fatten your wallet. But you might actually be better-served listening to friend number two. That's because today's high-flying fund often turns out to be tomorrow's laggard, while today's laggard often (though not always) improves its performance. Jeff Ptak, president and chief investment officer of Morningstar Investment Services, explored this phenomenon in the June/July issue of Morningstar Advisor magazine; subscription required. Using rolling five-year returns he found that funds in a category's top quartile one year almost always fall out of it within a few years, while funds in a category's bottom half are more likely than those in its top half to rise to the top quartile five years later. 

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