What is the risk of investing in top-performing mutual funds? And why is recently great performance usually followed by poor performance? Investing in top-performing mutual funds comes with several risks, and recent strong performance is often followed by weaker results due to well-documented market phenomena. Risks of Investing in Top-Performing Mutual Funds Mean Reversion: Mutual fund performance tends to revert to the mean over time. Funds that outperform their peers are likely to see their excess returns diminish as the factors or luck that drove their success fade. This means that investing in funds after a period of strong performance may expose you to disappointment as returns normalize. Herding and Overcrowding: When a fund achieves top performance, it often attracts large inflows from new investors. These inflows can force the fund to buy more of the same assets, potentially driving up prices and reduci...
Investment and economic observations by N. Russell Wayne, CFP, MBA. Mr. Wayne is the president of Sound Asset Management, inc. and former Managing Editor of The Value Line Investment Survey.