Beat the market with no-load mutual funds
by Gary Zin, Ph.D.
In the past, I have invested in mutual funds based on their long-term performance, typically requiring
that a fund's five-year history exceed the compounded return of Standard & Poor's 500-stock index (S&P
500). In general, a diversified portfolio based on this criteria will do well, perhaps slightly exceeding and
rarely falling far behind the stock market. But, the portfolio generally does not substantially exceed the
returns of an index fund representing the broad market.
There is substantial evidence to support the premise that stocks (or commodities) outperforming the
market with strong momentum generally continue to outperform the market. Likewise, mutual fund
managers whose investment styles and philosophies have outperformed the market tend to continue
outperforming the market. In light of this, I've developed a technique to identify and select mutual funds
that are most likely to continue substantially exceeding the broad market returns.
Mutual fund selection systems are not new. Dr. Donald Rugg presented his momentum measurement
index for mutual funds at CompuTrac's 1988 TAG X Seminar. He calculates a fund's percent change in
net asset value for one, three, six and nine months and adds the four percentages together to create a
performance index that emphasizes the most recent performance. The higher the index, the better the
mutual fund's performance.