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stories of these savvy investments and all the money that has been made from these top performing funds. Human nature takes over and investors develop a herding mentality as the past returns, the favorable press coverage, and the desire to keep up with peers and not miss a "sure thing" act as a powerful inducement for pulling the trigger on the latest hot investment.

While it is clear how these factors can lead to investors chasing the funds with the top returns, the key question is what effect does this have on the fund manager and future returns. The efficient market hypothesis states that securities are always priced exactly as they should be, and that each future price movement is random as it is the result of future events that are by definition unknowable. For proponents of this theory, the reason that top performing funds will underperform in the future is merely reversion to the mean. Simply stated, the theory dictates that funds that outperform do so because of luck and eventually that luck will run out. Even for those who disagree with the efficient market hypothesis and believe that managers can consistently outperform the market, one of the inescapable ironies of the mutual fund business is that the larger a fund grows the more difficult it is for the mutual fund manager to continue to earn market beating returns. An overall market or sector is really just the average of all the securities in it. As a mutual fund grows in size it more closely resembles the market as the manager is forced to purchase more and more securities. Most funds have a mandate that the majority of the cash in the mutual fund must be invested quickly as investors do not want to pay mutual fund fees to hold cash. As greater amounts of investor cash comes into the fund the manager is forced to come up with more and more above average "ideas" as the pressure grows to continue to find securities that will outperform the market. Understanding the difficulty of investing large sums of money, mutual fund companies will often close funds to new investors at certain asset levels to stop the manager from being inundated with new cash to invest. However, just because a fund is still open to new investors does not mean that it is not too large as the motive to generate higher profits is a powerful enticement for the fund to remain open after it has exceeded its optimal size.

While there is no fool proof system to avoid the potential pitfalls of top performing funds, there are some steps

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