Below is an interesting article on mutual funds and the mistakes made when market participants purchase them. It is known in the industry that the actual investors in mutual funds tend to have far worse performance than the actual funds, due to their tendencies to jump in at the tops, and out at the bottoms. This sheep like mentality is very dangerous and should be avoided if you wish to invest successfully. Historically, about three quarters of mutual funds under-perform their respective indices, so many would be better just investing in low-cost index funds. I wouldn’t advocate this given current market conditions because the indices appear to be quite expensive in both equities and fixed income.
More important than focusing on past performance is to understand the investment process that is being used. A perfect example of this occurred in 2011 with Bruce Berkowitz and the Fairholme fund. Berkowitz is an exceptional investor who actually won the Morningstar fund manager of the decade award for the period between 2000-2010. In 2011, Berkowitz was heavy in deeply undervalued financials that sold-off heavily between the summer and the fall due to the European Sovereign Debt Crisis. His fund was down approximately 30% that year and investors left the fund in droves. Since that time Berkowitz has been one of the top performing fund managers, led by those same financial stocks, which were problematic during that brief period of time. Nobody times the market perfectly and short-term under-performance is to be expected. Understanding the process helps investors not panic in times of turmoil.