Most people evaluate money managers from their past returns, but it is easy to get into trouble doing this. Here are some of the potential problems:
1. Future returns. If you and many other investors buy a mutual fund that has recently experienced exceptional returns, that fund will be flooded with cash. In a rising stock market that low-paying cash will drag down future investment returns.
2. Taxes. Furthermore, you will potentially be liable for taxes on past gains if your fund is not in a tax-sheltered retirement account. As your fund sells its holdings (and stock funds on average sell 80-95% of their investments each year), you become liable for your share of capital gains from those sales.
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