70 all-weather winners: stock mutual funds.(CR Investigates)(Product/Service Evaluation)

It happens all the time: While reading the newspaper or watching a finance program on TV, you learn about a mutual fund whose returns are zooming upward. You check it out and learn that it outpaced the Standard & Poor's 500 Index not only in the last year but also for the last three years and five years. Congratulating yourself on finding a solid investment, you write out a check.

Almost immediately however, the fund plunges, and it stays in a performance trough for what seems like years. Why is it, you ask yourself, that every mutual fund you buy drops like a rock in a well the moment you invest?

Don't think for a minute that your experience is unique. Millions of Americans wind up buying high and selling low. There's an explanation: A mutual fund, like most other investments, may hit highs once in a while but perform listlessly most of the time. And the highs may be high enough to make the fund's long-term returns look respectable. Take the Janus Twenty Fund. Because of the 545 percent gains it enjoyed from the beginning of 1995 to the end of 1999, its 10-year performance still tops the Standard & Poor's 500, even though it lost 63 percent for the years 2000 through 2002.

Paul Herbert, a senior analyst with Morningstar Inc., the Chicago financial research company, points out that investors usually jump into a fund when it has posted high returns. But, he says, "most funds that end up leading or lagging the pack for short periods are very concentrated in certain areas." As soon as they cool off, the fund's performance chills. That's why funds at the top of the annual performance charts seldom repeat from one year to the next.

There are ways to avoid this investment roller coaster. One is to invest in index funds or exchange-traded funds (ETFs). Both mirror the performance of a broad market index such as the Standard & Poor's 500. You earn exactly what the market earns minus fund expenses. The downside: You can never do better than the index, and when it drops, you're stuck with losses.

We propose another option: Choose funds that outperform the market--not just once or twice a decade but repeatedly With such funds, you would not have to try to time market swings, a pursuit that baffles even professionals. And because you are in all probability pumping money regularly into a 401(k) or some other investment plan, you would know that the money you invest this quarter will get long-run returns similar to those earned by money you invested last quarter. And that if you have to redeem shares in a market downturn, your fund will be less likely to have suffered a steep drop.

CONSUMER REPORTS decided to hunt down and identify reliable outperformers. To do so, we created our own consistency score that reflects a fund's risks, performance, and management over 10 years. Starting with 1,327 actively managed U.S. stock funds with a 10-year history that are available to individual investors in Morningstar's database, 70 met our requirements. (See our Ratings starting on page 31.) We also included a tax-cost ratio and fiduciary grade, the last a new measure developed by Morningstar in the wake of mutual-fund trading scandals of recent years: it registers how closely a fund company watches over the interests of individual shareholders. We used it to screen out companies with failing grades.