FUNDS


And the Winners Are...

Nearly four years after the catastrophic 2000-02 downturn came to a merciful end, investors can't help but wonder -- with good reason -- whether the bear is back for an encore. Fears of rising inflation and still-higher interest rates following 17 successive rate hikes by the Federal Reserve helped spark a brief but sharp slump in stocks around the world last spring. Markets seemed to regain their footing, but tumbled once again when hostilities flared in the Middle East.

In the accompanying slide show of the winners, we present the best performers in ten stock-fund categories over five different time periods. These lists include funds that are closed to new investors, those that levy sales charges, those that have grown excessively large and those whose managers may have been driving taxis a year ago. (For our recommended list, see The 25 Best Mutual Funds, May.)

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Slide Show: Top-Performing Mutual Funds
Complete Mutual Fund Rankings
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In any case, stocks would have to fall drastically to erase the gains that fund investors racked up since the market bottomed in October 2002. That's particularly true for those who held funds that invested in some of the riskiest markets and sectors -- domestic and foreign small-company stocks, emerging-markets stocks, and gold shares.

But past performance, as they say, is no guarantee of future results, and it can sometimes be an indicator of what won't flourish next. We expect the leaders over the next few years to come from other categories. As we suggest in What Investors Should Do Now, look for funds that invest in big companies to recapture leadership from those that hold shares of smaller firms. And long-suffering big-company growth funds should prosper as investors turn toward high-quality companies.

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Because it's so hard to predict short-term market gyrations with any degree of accuracy, Kiplinger's does not advocate all-or-nothing market-timing moves. Most investors should base where they invest their money on their time horizon and tolerance for risk, and they should rebalance their portfolios on a regular schedule.

But there is nothing wrong with adjusting your portfolio on the margins to reflect thoughtful analysis. So consider lightening up on funds in categories that have performed well in the past few years and increase your holdings in areas that have lagged. Adjusting may cause you to part with funds that have been profitable friends, but it may prove healthier financially.

Go to Top-Performing Mutual Funds Slide Show
Go to Kiplinger's Complete Mutual Fund Rankings


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