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Chapter 14. Betting on the Right Horse > Picking Last Year's Winner—A Story of ... - Pg. 137

Betting on the Right Horse 137 Picking Last Year's Winner--A Story of Annual Returns One of the biggest mistakes investors make is picking the fund that did well last year. Rarely does this strategy work. In fact, some researchers concluded that you would have done better by selling your winners each year and buying the losers. The second mind-set that can kill you (in an investment sense) is putting all your 401(k) money in only one or two of the funds in the plan. A 1999 study conducted by Fidelity found that 401(k) participants had a "fatal attraction" for one or two investments. The research found that 50 percent of workers with 7 to 15 options available invested in no more than two funds. And it gets worse as we get older. As participants age toward 65, more than 50 percent of workers shift their assets into fixed-income funds. When you combine these facts with what we learned in Chapter 12, "Looking for Mr. Goodfund" (fixed-income funds can get hammered when interest rates go up), and Chapter 13, "Taking the Long View" (inflation eats away at the value of bonds over time), you realize that many investors will have a rude awakening when they retire if they stick with this "all or nothing" strategy. To prove both of these points, let's play a little game with eight different types of investments. The eight are very common funds and some that you might even find in your 401(k). The period that we chose is 1990 to 2000. We wanted a period that had some ups and downs; everyone is a hero when the markets are up. There are only two rules in our game: 1. 2. All of your money must go into only one investment. Each year you buy last year's best performer. Let's imagine that you started working at a new company in January 1997. It's now time to decide which of 11 401(k) investments will get your contributions and rollover money from your previous employer. So you look back at 1996 and see that Gabelli Westwood did the best. It did well then and should do well again, so that is where you put all your money. Go back to January 1998, and looking back on your decision--did you bet right? Not too bad, but you should have been in Weitz Value (mid-cap value) in 1997. So, you moved all your money for 1998. And so on, and so on. Table 14-1. Fantasy 401(k) Plan Historical Annual Returns Options Schwab Value Advantage Money Fund PIMCo Total Return Fund-- D shares Oakmark Equity & Income Fund-- I shares Schwab Inst'l Select S&P 500 Index Fund Gabelli Westwood Equity Fund-- Ret. shares Van Kampen Emerging Growth Fund--A shares Weitz Value Fund Alger Mid Cap Growth Fund -- Ret. Shares Royce Low Priced Stock Fund Wasatch Small Cap Growth Fund 1996 5.3 4.5 15.3 23.1 26.8 17.9 18.7 15.2 22.8 5.2 1997 5.4 9.9 26.6 33.4 29.6 21.3 38.9 20.3 19.5 19.2 1998 5.4 9.5 12.4 28.6 13.1 34.7 29.0 39.2 2.4 11.2 1999 5.0 ­0.6 7.9 21.0 14.7 103.7 21.0 41.8 29.8 40.9 2000 6.2 11.7 19.9 ­9.2 12.0 ­11.4 19.6 17.0 24.0 16.8 YTD 2.2 2.2 12.5 -4.5 0.9 ­19.6 4.1 ­1.5 16.7 7.3