One of the best regular benchmarks for fund performance is the S&P Dow Jones Indices' Persistence Scorecard, which McGraw-Hill Financial issues twice a year after it researches fund records over several annual periods.
Through September of this year, S&P found that only 19 percent of large-company funds, 20 percent of mid-sized company funds and 27 percent of small-cap funds held their top-half performance rankings over three-consecutive three-year periods. That means up to 80 percent of top-performing funds couldn't repeat their great returns.
Over a half-decade - five consecutive annual periods - the persistence shortfall is even worse: Only about 8 percent of large-cap funds, less than 1 percent of mid caps and about 10 percent of small caps were repeaters in the top ranks.
Even if you were to buy and hold the top performers over five years, it's highly unlikely that they'd ever be winners again. It's the equivalent of playing the same "winning" number on a roulette wheel. Unless luck or chance intervenes, you'll come out a loser.
How do you avoid performance chasing? Buy index funds to hold large baskets of stocks and bonds instead of making more targeted bets.
A fund such as the iShares Core S&P Total U.S. Stock Market ETF represents some 1,500 stocks. It's up nearly 30 percent for the year through December 20 and has averaged 18 percent over the past five.
That handily beats the current returns of the two top performers of last year and it only charges .07 percent annually for management - a fraction of the fees typically charged on more specialized funds. It holds mega-cap stocks like Apple Inc., Exxon Mobil Corp. and Google Inc..
To get your head around the concept of consistently holding most of the market long term, keeping in mind you can still have losing years, you'll have to accept that it's nearly impossible to guess which stocks and sectors are going to outperform in any given year. This is not a leap of faith; it's a leap of ego.