It’s so interesting. Here is the June cover story of Smart Money touting “Superstar Funds.” It’s the annual feature in which the editors put far more effort than you or I likely could into analyzing the entire universe of available mutual funds in order to find the very smartest picks.

When asked about mutual funds myself, I usually just punt and suggest the Vanguard Index Trust. If pressed, I point to a few other old favorites in the appendix of my book.

But here is Smart Money with a well-researched, well-intentioned, well-written report, selecting just seven funds. There’s no way to know in advance, of course, how well these seven will do. But Smart Money dutifully gives us an update on how well last year’s Smart Money Superstar picks performed. And guess what? If you had invested equally in all eight, you would have been up a whopping 27.7%. Whereas if you hadn’t done all this research and had simply invested in the Vanguard Index Trust, you would have been up 28.2% over the same period.

(And the irony is even a little sharper, because the 27.7% Superstar return doesn’t take into account the “load” some of the Superstars charge. Vanguard, by contrast, charges no load.)

Whether picking specific stocks or specific mutual funds, it’s very hard to beat the market. The no-load, low expense Vanguard Index Trust beat the eight Superstars last year by half a point. There’s no telling what will happen this year, with this crop of Superstars; but wherever they end up — up 25%, down 25% — I’d expect boring old Vanguard do pretty much as well. Why? Because with its very low expenses, it has considerably less of a handicap than the others.

Your big decision with stocks isn’t which ones or which funds to buy, it’s whether to buy them at all and how. My suggestion: an unshakable discipline to invest $1,000 a week or a month or a quarter or a year — whatever amount of “long-term” money you can comfortably set aside — in one or two or three no-load, low-expense mutual funds, and/or some individual stocks you expect to be comfortable holding for a long time (to minimize taxes and transaction costs).

The other big decision is what proportion of your stock market funds to invest in the U.S. market, especially when it’s as high as it is these days, and what proportion in funds that invest overseas.

For the record, Smart Money’s 1995 Superstar picks were John Hancock Special Equities A (up 53% from April 21, 1995 to April 12, 1996), MFS Emerging Growth B (up 43%), the Kaufmann Fund (42%), Oppenheimer Quest Opportunity Value A (31%), Oppenheimer Main Street Income & Growth (27%), Wassatch Aggressive Equity (25%), Crabbe Huson Special (7%) and Parnassus (down 5%).

This year’s Superstar picks are — well, I don’t want to keep Dow Jones from selling magazines, so go read them for yourself.


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