When selecting a mutual fund, new isn't always better
— -- In an ideal world, a little man with a big mallet should whack you on the shins whenever you think of investing in a brand-new mutual fund.
You can choose between many perfectly good existing funds, all of which have track records. And if the past 12 months have proved anything, it's that the world doesn't need novel new financial products.
New funds are prone to being faddish as well as unnecessary. Mutual funds are sold, not bought, and few things sell a fund better than a hot new investment trend. But it takes a few months for a fund company to spot a trend, and a few more months for the fund to get approval from the Securities and Exchange Commission for sale to the public. By then, the trend is colder than a week-old Easter ham.
Consider the exchange traded funds that made their first appearances in the first quarter of 2008. Not all fared badly. But many did. Among the worst:
Market Vectors Coal Ticker:KOL12-month loss:-63.3%. Coal companies were red-hot in 2008, until oil prices plunged and made bitumen brokers bitter.
ProShares UltraTelecom Ticker:LTL12-month loss:-62.0%.A basic rule of investing: Be wary of anything with "ultra" in its name. In this case, the fund used futures and options to double the returns — up and down — from an index of telecom stocks. Guess which way telecom went.
Market Vectors: Gaming Ticker:BJK12-month loss:-60.2%.Casinos are a good bet when the good times are rolling. In the worst recession since the Great Depression? Not so much.
SPDR S&P International Dividend Ticker:DWX12-month loss:-55.7%.This fund has a decent premise. It buys stocks from around the world with high dividend yields. Unfortunately, many high-yielding stocks slash their dividends in a global economic downturn. When that happens, investors slash those stocks' prices.
Wisdom Tree India Earnings Ticker:EPI12-month loss:-50.9%.India's stock market, and India generally, were red-hot in 2007. Unfortunately, the global meltdown hit India as hard as it did everywhere else — and then some.
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