Do you look at the mutual fund rankings that magazines publish every year? The performances can often be eye popping. Have your ever seen a year that the best performing mutual funds had a loss? Of course not, there's always funds that have a good year, even in the bear market years. It might be energy sector or medical sector, or foreign country mutual funds that have a good year.

For example, let's look at the Fidelity family of funds. Since 1988, Fidelity has always had equity funds that were positive for the year. The worst year was 2002, when both the S&P 500 and the Russell 2000 were down over 20% for the year. Even then, Fidelity still had 6 of 94 equity funds with positive returns. A challenging environment to be sure, but there were still opportunities.

If you look at the years 2000-2002, they were pretty tough on the market overall, yet the returns of the top 3 mutual funds were pretty good each of those years.

Conversely, if you look at the worst performers even in the best years it becomes obvious that there is always a bear market somewhere as well.

Fund selection plays an important role in crafting your portfolio’s performance. Even though “rising tide lifts all ships” there is a big difference between the best and the worst, regardless of the overall market’s return for a given year.

It turns out that if you restrict your holding period to something less than one year, you’ll find that this trend of bull and bear markets continues to hold true.

The fact is, given the so-so performance of the market over the last several years, the only real tool available to the average investor to create real wealth has been fund selection.

The trick of course is finding those high performing funds before they are finished going up. Fundamental analysis works well for many people, but it's hard to back test for historical performance, and it can take a lot of work, more than your average investor has available to devote to his portfolio. So, how do we increase the odds that the average investor like us can find funds that will increase in value after we buy.

The one real advantage that the small investor has is that he can be quite nimble, moving his assets from one fund to another overnight, with no impact on the markets. The other thing to realize is we don’t have to be the smartest guys in the house, we just have to follow smart traders. That makes the whole problem a lot easier to solve.

A trend following system can work well for the small investor. It leverages the advantages of being small, but can still be done without incurring the early redemption fees of many mutual fund companies. And by using simple rules to create a trend following system, the performance can be back tested and some performance over varying market conditions can be evaluated.