Dear Mr. Berko:

I have $48,000 and want to invest $16,000 in three different mutual funds, and I’m having trouble understanding those complicated analysis terms that are supposed to help me make a better fund selection. I don’t understand the terms style, style drift, alpha, beta, R-squared, standard deviation and Sharpe ratio. Isn’t there a way to pick a good long-term mutual fund without having to have a degree in higher mathematics from Harvard? I thought that picking a mutual fund recommended by various financial websites I look at would be easy. But all these fancy concepts just make it more confusing for me to find the best fund for my retirement goal in 21 years. Thank you in advance for your help.  T.W., El Paso, Texas

Dear T.W.:

Those confusing concepts are seven reasons we’re supposed to hire stockbrokers to help us make good investment choices. But the first problem is that a stockbroker will most often select the mutual fund that pays him the best commission. And that’s not good! The second problem is that a stockbroker is highly encouraged to recommend a mutual fund that is preferred by his firm. And that’s not good either, because too often there’s a conflict between the broker’s advice and his employer’s interest. And the third problem is that I don’t know of a single stockbroker who understands what those concepts mean. Just for grins and giggles, ring your broker today and say, “Hey, Sam, tell me what a Sharpe ratio is, and what does R-squared mean, and why is this important to me in picking a mutual fund?” I’ll wager you $10 to a road apple that your broker is unable to explain the investment merit of those terms.

Choices, choices and choices. There are more than 10,000 open-end mutual funds to choose from, and many professionals would have you believe that choosing the best mutual fund for long-term investing is as complicated as brain surgery. However, picking the right long-term growth mutual fund should be as easy as falling off a piece of cake, and you don’t need all that fancy-schmancy nomenclature.

Because my two teenage grandsons have some knowledge about the stock market, I was able to teach them (in less than a dozen minutes) how to select the best funds for their long-term growth objectives. Begin by selecting six long-term growth funds that look good to you from the tout sheets you glimpse, but only select mutual funds that have a 10-year performance record. Write the name of each fund in the center of the top of a 5-by-7-inch card. Skip a line, and horizontally, under the fund’s name, from left to right, write the fund’s annual performance record (+8.2 percent, -2.9 percent, +13.8 percent, +11.1 percent, +19.4 percent, etc.) for each of the past 10 years. Then, directly beneath this line, list the year-end performance of the Standard & Poor’s 500 index (+8.1 percent, -3.1 percent, +11.5 percent, -5.8 percent, +17.2 percent, etc.) for each of the past 10 years.

Now you can glimpse an easy-to-understand picture of the long- and short-term comparison between the funds you are looking at and the S&P 500. Do it with all six funds. At first blush, this may not make a lot of sense. However, after comparing the 10-year annual performance of the first fund with the 10-year annual performance of the S&P 500, you’ll think to yourself: “Yes, this makes sense. This is how to select a mutual fund!”

I know that the Securities and Exchange Commission and the New York Stock Exchange warn investors that they should not rely on past performance to predict future results. However, I think it’s fair to say that the advice of those two organizations never has been worth a tinker’s dam and seldom has been in the public’s interest. Past performance has always been the best predicator of future results.