Making money: What the experts say

Don’t get star-struck; The threat of U.S. debt; Amish entrepreneurs

Don’t get star-struck

Mutual fund investors “adore” Morningstar and the research firm’s one- to five-star ratings, said Jane Bryant Quinn in CBS Money “pours” into funds that get five stars. Yet Morningstar’s ratings are based on historic returns, and the company’s “own research” shows that they aren’t a particularly strong indicator of how a fund will perform in the future, especially “in years of big market changes.” According to 2007 data, five-star stock funds didn’t do much better than one-star funds over two years, and bond funds and balanced funds with one- and two-star ratings actually did better than the “five-star glamour boys.” While it most likely “pays to ignore” one-star funds, don’t pick a fund based on star ratings alone. In fact, a better predictor of future success is fees; the lower they are, the better your true return.

The threat of U.S. debt

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While much attention has been trained on Greece and other highly leveraged foreign countries, America’s debt—now 93 percent of projected 2010 gross domestic product—is equally frightening, said Jason Zweig in The Wall Street Journal. Government debts can be a drag on growth, so “the risks of an economic slowdown and a recurrence of inflation down the road are very real.” Investors can protect themselves with commodities, inflation-protected bonds, and emerging-market stocks, but these asset classes are overpriced right now. When the economy slows, investors will dump commodities, giving you the chance to buy “some real protection” at a bargain. If you can stomach some risk, though, buy European stocks immediately: Many big names are “getting cheaper by the day.”

Amish entrepreneurs

If you want to find the country’s most successful businesses, book an express buggy to Amish country, said Geoff Williams in Amish businesses have an “eye-popping” 95 percent success rate in their first five years—compared with just 50 percent for the average new business. Amish entrepreneurs tend to succeed because they “stick with what they know.” It helps that they’re immersed in a culture of hard work and cooperation. “Networking through Facebook doesn’t exactly have the same community-building pull as teaming up with neighbors to build a barn.”

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