Every time another magazine, newsletter or mutual fund researcher comes out with a new "Top Funds" or "Best Funds to Buy Now" list, Peggy Ruhlin hears about it.
From her clients.
"I'm constantly hearing from them," says the Columbus, Ohio, financial planner.
"They say, 'Why are these three mutual funds of mine not on this list?' " Ruhlin says. "I won't say it's a major pain, because I think we've educated our clients about these things, but . . . ugh."
Ruhlin is bracing for another round of calls now that Morningstar, the respected Chicago-based fund tracker, has come out with its own best-funds list of sorts. In the latest issue of the newsletter Morningstar Fund Investor, Morningstar's analysts pick "75 favorite" funds for the long-term.
This list is not to be confused with competitor Standard & Poor's ongoing "Select List" of top-grade funds, which S&P;'s mutual funds unit is gradually unveiling.
Which is not to be confused with Money magazine's annual "Money 100," the one the publication dubs "the world's best mutual funds."
Which is not to be confused with Mutual Funds magazine's annual year-end listing of the Top 10 funds for the coming year.
True, the lists do indeed name widely respected funds. And if you see one or more of your funds among the select, it may be a reassuring sign that you aren't picking lemons.
But these lists also can do a disservice to mutual fund investors.
Well, here are the Top 5 Ways Top Funds Lists May Confuse Investors:
1. Readers may get the impression that these are the only terrific ideas out there.
Which is simply not true. In a universe of more than 11,000 mutual funds, there aren't just one or two excellent large growth-stock funds or foreign funds to own, for instance--there are dozens.
Just because a fund doesn't make Money's or Morningstar's list this year (or any other) doesn't mean it's a bad fund.
2. Some investors may be encouraged to pad their portfolios.
Studies have shown that investors can achieve sufficient diversification in their portfolios through four to six mutual funds. But, planners say, people who already have well-diversified portfolios may read these lists and think they are seeing "must buys."
Notes Dee Lee, a financial planner and president of Harvard Financial Educators in Harvard, Mass.: "All of a sudden, instead of five or 10 or 15 funds, people have a portfolio of 40 or 50." And often, Lee says, "many of the funds in their portfolio overlap." That is, the funds invest in the same or similar stocks, which does you no good.
3. The lists may encourage short-term performance-chasing.
Some lists change significantly from year to year. To note an extreme example, none of the "Top 10" funds on Mutual Funds' magazine's 1998 list made it onto its 1999 list.
Some readers will buy or sell as they appear and disappear from these lists. Yet jumping in and out of funds to chase performance is dangerous, Lee says, as frequent trading can trigger taxes, and trading costs are likely to cut into your overall performance.
4. These lists sometimes hurt the very funds they're trumpeting.
The Heisenberg Principle of physics says it's impossible to study something truly, because the act of observing its behavior changes that behavior. Something like occurs when you shine the light of publicity on a mutual fund.
Thousands of investors will flock to it. But a large influx of new money isn't necessarily a good thing for a mutual fund, especially if it comes in all at once. That's because the fund's managers may have difficulty putting all of it to work immediately. They may have to store some of it in the form of cash while they come up with new stock picks--or they may just put it into their second- or third-best ideas. Then the very returns that attracted all the attention in the first place will start to suffer.
American Century Giftrust, which invests in small companies, is one once-hot and heralded fund that got tons of money after receiving publicity earlier in the decade. Then it tanked, in part because it found it difficult to put hundreds of millions of new dollars to work, coincidentally at a time when small stocks were starting to go out of favor.
5. Many lists discuss only actively managed funds.
Often forgotten are low-cost index funds that simply track market benchmarks--and in doing so, have beat the majority of actively managed funds recently. Many pros believe index funds make a great anchor for a portfolio. Throughout the 1990s, you would have scored big just by sticking a portion of your money in an index fund that tracks the Standard & Poor's 500 index of blue-chip stocks.
If you're tempted to change your investments on the basis of one of these lists, don't be in a hurry. Think of the names you see as suggestions of some good examples of sound funds that you may want to investigate further, not as the one and only definitive collection of funds you must have.
Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at firstname.lastname@example.org.