How do I Find a Mutual Fund that will Outperform the S&P 500 Index?

There are rays of light shining through the underperforming mutual fund industry. For example, there are funds that have outperformed the S&P 500 Index over the last 18-30 years. The trick is finding them. The most effective and simple method of locating a strong mutual fund involves evaluating its performance over the last 18 to 40 years. Mutual funds that have grown at least 18% over the last 18 to 40 years have, in a sense, proven themselves and are worthy of your attention. Will the fund you choose to invest in return 18% or more over the next 20 years? No one can answer that question. The following sentence is clearly stated in every mutual fund prospectus:

Past performance is not a guarantee of future results.

Nevertheless, past performance provides us with a very valuable evaluation tool. Fund managers decide when to buy and sell stock which ultimately determines the performance of the fund. The longer the fund has been around the more likely the fund has been controlled by different managers. This is very important. Funds that have performed well and experienced significant management turnover are performing well independent of the managers. Why is this important? 

Managers come and go on a regular interval. You do not want to invest in a fund that is doing well due to the efforts of a talented fund manager. Guess what will happen to that manager? He or she will be lured with huge sums of money to another fund that has been underperforming. Of course, the manager will leave your fund for greener pastures. This in turn jeopardizes your investment. Will the fund find another qualified manager? Maybe, maybe not. To reduce risk in the stock market you need to invest for the long-term (7-40 years), therefore, you need to find a fund that has performed well due to the fund's investing strategy, not the manager. 

Funds that have experienced significant management turnover and long-term performance are following a defined protocol or recipe to buy and sell stock. The managers are not developing and executing their own investment strategy. They successfully execute the fund's proven method of buying and selling stock. In a sense, these funds control the "robotic manager." 

Success over 18 to 40 years is not an accident and it is not a result of a hotshot manager. It is a result of a disciplined buying and selling strategy.

Would you feel more comfortable investing in a fund that has been managed by one manager over the last 5 years or 6 managers over the last 25 years? Savvy investors invest in the fund not the manager. Managers come and go. Investing in funds without a significant history is risky. Do not be swayed by the outrageous performance of young funds that have been managed by "flash in the pan" managers. Invest in the old timers that have proven themselves. 

This is a game of risk management. Address risk by investing in funds that have performed well over the long-term, ignore everything else.