We’ve had a couple of articles on the value of using Morningstar Rankings or Ratings to make your mutual fund selections. It is hard to research mutual funds without running into the Morningstar rankings, you’ll find them even on the brokerage sites like Fidelity or Ameritrade. But the research on how effective a tool they are for predicting a funds future performance does not generally paint a rosy picture. We’ve written on that topic of Morningstar rankings in the past.

But here is another article we ran across some time ago that is authored by Morningstar titled “How to Avoid 5 Star Dud Funds.“. The very nature of the title suggests that one should not be using the star ratings exclusively to guide your mutual fund selections, and that advice comes from Morningstar itself.

Take the ratings for what they are, basically a scorecard of past performance, spanning up to 10 years. That in itself is not a bad thing, but the real question to ask is whether or not that is a useful predictor of future performance. The fact is that while there is some long term correlation, for a span of time like a year or less it is of almost no value. For that type of fund selection, you need to be looking at a shorter history for your rankings. For example, our rankings use the 1-4 month time frame to guide their selection.