Nothing lasts

And in the mutual fund world, top performance is the main thing that doesn’t last. There are very few Triple Crown winners in the fund world.

"Seabiscuit workout with GW up" by Seabiscuit Heritage Foundation - Seabiscuit Heritage Foundation. Licensed under Public Domain via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Seabiscuit_workout_with_GW_up.jpg#/media/File:Seabiscuit_workout_with_GW_up.jpg
“Seabiscuit workout with GW up” by Seabiscuit Heritage Foundation – Seabiscuit Heritage Foundation. Licensed under Public Domain via Wikimedia Commons –

Standard and Poor’s released its annual Persistence Scorecard and, predictably, it showed that few managers who are at the top stay there for long. In particular:

Out of 682 domestic equity funds that were in the top quartile as of March 2013, only 5.28% managed to stay in the top quartile at the end of March 2015. Just 3.95% of the large-cap funds, 5.26% of the mid-cap funds and 4.67% of the small-cap funds remained in the top quartile.

Over the longer term, the results are even worse. How many funds remained in the top 20% over five years? That would be none. Zip. Zero.

For fund investors, this means that your odds of picking a long-term winner are thinner than your odds of getting a new cell phone in less than three hours. And this strengthens the case for index funds: You won’t get a fund that’s in the top 20%, but you won’t get one that’s in the bottom 20%, either.

And speaking of the bottom 20%: The research shows that it’s more likely for a fund in the top 20% to be in the bottom 20% over time than it is for the reverse. Bad funds tend to stay bad, typically because of expenses, and there’s no real reason to try to bargain-hunt among mutual funds.

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