06/30/2009 09:41 pm ET Updated May 25, 2011

Smart Investor Makeover: Picking Hot Mutual Funds and Other Fables (Video)

Every day brokerage firms across the country recommend mutual funds to their clients.

Sometimes they make these recommendations based on Morningstar's much hyped "star" ratings. They may also rely on the past performance of the fund or the fund manager.

It's all an elaborate con.

One study showed that 5-star Morningstar rated funds actually underperformed the mutual fund averages in ensuing years.

The media reinforces the ability of "experts" to pick superior funds. Forbes has an annual "Honor Roll' of mutual funds which it touts as being helpful to investors. Vanguard founder, John Bogle, examined the "Honor Roll" picks from 1974 to 1990. He found that "Honor Roll" funds significantly underperformed the markets during the period after their selection. The cumulative returns of the "Honor Roll" funds was 439.7% vs, 633.4% for index fund investors.

In this week's video, which is entitled "No Stars," I discuss the data you need to know to make informed decisions about mutual funds.

If I had thought more about the title, I would have called it "No Conscience."

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.