`Best picks' lists are not a substitute for research

Your Funds

Dollars & Sense

October 14, 2001|By CHARLES JAFFE

THE LETTER from the Rev. Eugene Lewis of Huntsville, Ala., sounded just a bit indignant.

"I can't understand why when a newsman puts certain things in the paper ... he never tells the public who has the best product," he wrote.

"Now what I want from you, is a list of the good mutual funds. I plan to invest."

My column has drawn similar reactions and complaints over the years, and I have long wrestled with this question.

Unfortunately, I don't believe a list of "the best funds" truly can be done, not by me or anyone else.

Many try.

Magazine lists

Money magazine publishes its annual list of the 100 top funds every spring. Bloomberg Personal and Mutual Funds magazine both published lists of the best funds (naming 150 and 100 funds respectively) in their August issues. Morningstar analysts now name their favorites by category - though they change their list whenever they change their minds.

And every quarter, you get lists of top performers, sliced and diced in countless ways.

But those lists don't work. They're too darned big and impersonal.

As Lewis put it when I called him up to discuss his letter: "If you gave me the names of 150 funds, I wouldn't know the good ones from the bad ones, so I wouldn't be any better off than I am now."

And a smaller list of, say, my favorite funds, wouldn't work either. To begin with, I don't pick or recommend individual funds for readers. Even if I did, my list would be too small and too personalized. It might even serve as an invitation to some to abdicate the proper research that should go into any investment.

Shortened list

Noted Lewis: "If you give me five funds, then I might be able to go figure out which one I like best."

He quickly acknowledged, however, that he'd be pretty comfortable taking any fund off a list that short, so that if he couldn't get great research and really learn about the funds involved, he'd trust my judgment.

That's flattering, but no list of top funds, regardless of the source, should ever be more than a research starter.

To see why that is, consider Lewis, a man of 68 who plans to invest but only in a most conservative fashion. Virtually any stock fund - even the ones on the lists in Money, Bloomberg and Mutual Funds - is beyond his risk tolerance.

That's a problem for the Mutual Funds magazine list, for example, because it is completely devoid of bond funds.

Then there's the Bloomberg list, which has funds like White Oak and Rydex OTC among its large-cap growth suggestions. Both of those funds are off more than 50 percent this year and get a rating of just two stars from Morningstar (and a category rating of no better than average).

That doesn't make them bad funds, just not good ones for certain investors, no matter how highly some list organizer thinks of them.

Not for everyone

And that holds true for virtually any good fund in the business; it's right for some people, but not everyone.

That measure of "right" or "good" depends as much on the individual, his or her risk tolerance, time horizon, current asset allocation, and portfolio needs as much as it does on the quality of the funds. It may also depend on the type of fund (a do-it-yourself investor generally would disdain even the best fund that carries a sales charge), the account minimum (no sense wishing for funds you can't afford to buy) and more.

Ultimately, the only list of funds that matters is the one you put together yourself.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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