Hot fund, cold fund, 1, 2, 3. If you're seeking a few good funds and have set your sights on a few of last year's hottest ones, look before you leap. In many cases, last year's top performers will be funds of similar style and market sector, which means they'll probably all move in the same direction--not bad if that direction continues to be up, but no fun if things go the other way. That old saying, "Past performance is no indication of future returns," is especially meaningful here, as the performance of investments over time shows a regression toward the mean. A hot fund could cool off just as you're getting into it.
Instead, consider looking for fund managers with good long-term track records whose funds are out of favor and who aren't winning any popularity contests. By selecting funds that are out of sync with the current best and brightest, you'll have the chance to get in early on a trend.
See our tips on Wednesday, December 27 for part 1 and Friday, December 29 through Thursday, January 4 for parts 3 through 7 of this article.