System uses funds' prior performance as investing guide
— -- If you've ever forgotten to put on your parking brake on a steep hill, you know that objects in motion tend to stay in motion. The same is true with stocks — not just individual stocks, but broad sectors and investment styles, as well.
In recent months, of course, momentum has done the same thing to your portfolio as your car did to Mrs. Finster's chicken coop. Nevertheless, following a hot trend is not an entirely bad strategy, provided you're willing to take big hits in years such as 2008.
True, it's been a choppy ride for McDonald's, but the stock has found favor on Wall Street. One reason could be that the company has actually increased its earnings. Mickey D's earned $1.07 a share in the third quarter of 2008, vs. 90 cents a share the same period a year earlier. And analysts expect the fast-food chain to earn $3.82 per share this year, vs. $3.62 in 2008.
Other reasons? It may be that more people on Wall Street are eating at McDonald's these days than the $400 tasting menu at Le Grande Bonus. It may be that McDonald's is improving its menu. Or it may be that those few buyers left in the stock market perceive McDonald's as a reasonably safe bet in rotten economic times.
Similarly, good performance in mutual funds tends to persist. The No-Load Fund Investor, a newsletter, has been tracking its Persistence of Performance strategy since 1991. The premise is simple: Each year, invest in the no-load fund that has had the best performance in the previous year. ("No-load" means that the fund charges no commission, or load.)
