Investing
Why should you ignore the Morningstar ratings when considering which mutual fund to own? What should you be focused on? Why?
Why should you ignore the Morningstar ratings when considering which mutual fund to own? What should you be focused on? Why?
The Morningstar ratings (1 being the bottom 20% and 5 being the highest 20% in their category) show you past returns and past returns mean nothing when looking at future returns. NEVER chase performance and that means you should not buy a mutual fund just because it has a 5 star rating based on past performance. It is quite likely that reversion to the mean will occur and that mean that 5 star fund will turn into a 3 or 2 star fund in short order.
Focus your attention on the expense ratio of the fund and it’s turnover (how much buying and selling occurs in the fund). You want an expense ratio that is under .2% (many index funds can get you under .1%) and a turnover rate under 10% (preferably under 5% if possible). Here is the bottom line on this very important issue. Cost is directly related to your future returns. Stars are not!