Lower Returns, High Returns

They are cheap. One of the most common myths in the fund business is that “you get what you pay for”-that high returns are the best justification for higher fees. There are two problems with this argument. First, it isn’t true; decades of research have proven that funds with higher fees earn lower returns over time. Secondly, high returns are temporary, while high fees are nearly as permanent as granite. If you buy a fund for its hot returns, you may well end up with a handful of cold ashes-but your costs of owning the fund are almost certain not to decline when its returns do.

They dare to be different.When Peter Lynch ran Fidelity Magellan, he bought whatever seemed cheap to him-regardless of what other fund managers owned. In 1982, his biggest investment was Treasury bonds; right after that, he made Chrysler his top holding, even though most experts expected the automaker to go bankrupt; then, in 1986, Lynch put almost 20% of Fidelity Magellan in foreign stocks like Honda, Norsk Hydro, and Volvo. So, before you buy a U.S. stock fund, compare the holdings listed in its latest report against the roster of the S & P 500 index; if they look like Tweedledee and Tweedledum, shop for another fund.