Do you look at the mutual fund rankings that magazines publish every year? The performances can often be eyepopping. Have your ever seen a year that the best performing mutual funds had a loss?  Of course not, there’s always secgtor funds that have a good year, even in the bear market years. It might be energy sector or medical sector, or foreign country mutual funds that have a good year. 

For example, let’s look at the Fidelity family of funds. Since 1988, Fidelity has always had equity funds that were positive for the year.  The worst year was 2002, when both the S&P 500 and the Russell 2000 were down over 20% for the year. Even then, Fidelity still had 6 of 94 equity funds with positive returns.  A challenging environment to be sure, but there were still opportunities.

The table below gives an example of varied sector performance.

As you can see the years 2000-2002 were pretty tough on the market overall, yet the returns of the top 3 mutual funds were pretty good each of those years.

Click for full size image

Fund selection plays an important role in crafting your portfolio’s performance. Even though “rising tide lifts all ships” there is a big difference between the best and the worst, regardless of the overall market’s return for a given year.

It turns out that if you restrict your holding period to something less than one year, you’ll find that this trend of bull and bear markets continues to hold true.

The fact is, given the so-so performance of the market over the last several years, the only real tool available to the average investor to create real wealth has been fund selection.

The trick of course is finding those sectors for trading before they are finished going up. There are a lot of very smart people in the financial world who can come up with fundamental reasons why one sector is going to do better than another one, or one country will do better than another. They have more inside information than the average investor. They sit all day in front of a trading screen, that is more intellectual firepower than most of us can muster. So, how do we increase the odds that the average investor like us can find funds that will increase in value after we buy.

The one real advantage that the small investor has is that he can be quite nimble, moving his assets from one fund to another overnight, with no impact on the markets. The other thing to realize is we don’t have to be the smartest guys in the house, we just have to follow smart traders. That makes the whole problem a lot easier to solve.