Key idea
Do not compare funds on last year's return alone. A fair comparison looks at several things, on a like-for-like basis.
When choosing between two funds, the instinct is to pick whichever had the higher return last year. That is the least reliable comparison there is. A proper comparison is a short checklist, applied to funds in the same category.
A fair comparison checklist
- Same category: compare large-cap with large-cap, not with small-cap.
- Long-term returns: look at 5 and 10 years, not one.
- Expense ratio: lower cost is a certain edge.
- Consistency: steady across periods beats one lucky year.
- Behaviour in bad years: how far it fell in downturns.
- Benchmark: did it beat its own index, after costs?
Why like-for-like matters
Comparing a small-cap fund's return to a large-cap fund's is meaningless; they take different risks. And a single year's out-performance is often luck or a market that happened to favour that style. Consistency over many years, at a low cost, tells you far more than a one-year headline.
Compare within a category, over long periods, weighing cost and consistency. This turns fund selection from chasing winners into a sober, repeatable judgement. The final pick is yours to make.
Finished reading?
Marking this complete counts today, and your streak becomes day 1.