090: Why NOT to Invest in 5-Star Rated Mutual Funds

Learn why 5 star rated mutual funds are not all they are cracked up to be, the dirty little secret Wall Street doesn't want you to know, and what mutual funds will actually perform best.

According to a study done by Vanguard, in a three year period, the lowest rated funds actually generated the greatest excess returns, while the highest rated funds generated the least! 5-star funds performed the worst over the next 3 years and 1, 2, or 3 star rated funds performed the best!

Vanguard's study also demonstrated that, "an investor had less than a 50–50 shot of picking a fund that would outperform regardless of its rating at the time of the selection."

In 1966, the economist William Sharpe (the well-resected researcher that the Sharpe Ratio is named after) stated, "all other things being equal, the smaller a fund's expense ratio, the better results obtained by its stock holders."