A. It's very common for an investor to base investment decisions over a fund' past 3-year or even shorter period's performance. However, a research has shown that a considerably longer period is warranted.
Researchers* analyzed top-quartile mutual funds over the past 10 years and found the following:
- For even the best performing investments over the long term, underperformance during a 3 or 5-year period is a near certainty.
- Specifically, 90% of 10-year top-quartile funds were in the bottom half of their peer groups during at least one 3-year period.
- 63% of 10-year top-quartile funds were in the bottom half for at least one 5-year period.
The natural human behavioral tendencies - dropping investments that lag the market over a short term period - generally leads to failure. Avoid this bad tendency!
* The Next Chapter in the Active versus Passive Debate (2012 Update) by Investment Consulting firm DiMeo Schneider