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Mutual fund companies brag all day long about their amazing past performance, investment acumen, star portfolio managers, and stock-picking skill.
Unfortunately, when it comes to future performance, none of that stuff matters.
According to legendary Princeton professor Burton Malkiel, who wrote a seminal book on investing called A Random Walk Down Wall Street (now in its 10th edition), there's only one thing that matters when you're trying to pick a good mutual fund:
The expense ratio.
The what?
The expense ratio: The amount the mutual fund charges you to invest in it.
Mutual funds are a fantastic business for the fund companies, in part because so few mutual-fund buyers understand how much they are paying to own the mutual funds--and how much what they are paying affects their investment performance.
The cost of owning a mutual fund is deducted directly from the fund's performance. And unfortunately, there are very few mutual fund managers who are talented enough to offset the cost of their salaries and other costs over the long haul.
As professor Malkiel explains, studies of mutual fund performance have shown that one of the only ways to identify which funds are likely to perform better than average in the future is by looking for the funds with the lowest costs.
In other words, as Vanguard founder Jack Bogle puts it, in mutual funds, you get what you don't pay for. If you're trying to pick a good mutual fund, therefore, the first criteria you should look at is the expense ratio. And you should only consider the funds with the lowest costs.