For our annual Unloved Fund study, we find the three most unpopular fund categories at the end of each year, based on percentage change in cash flows, or how much money is going into and out of mutual funds. We then recommend that you buy one fund from each unpopular category and stick with them for three years. Our study also highlights the most popular equity categories--those that have seen substantial new inflows--and suggests that investors trim back on those areas. Morningstar has featured this strategy to 1994 and found winning results. From the beginning of 1994 to the end of 2010, the unloved categories earned 308% cumulatively or 9% annualized. That's far better than the "loved," or popular fund categories, which earned 157% cumulatively or 6.1% annualized. The MSCI World Index returned 4.6% annualized, and the S&P 500 returned 8% annualized.
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