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Don't mess about with mediocrity when it comes to buying and holding funds—buy the best and hold the best, writes Richard Moroney of Dow Theory Forecasts.

Investors should not waste time holding middling mutual funds. We don’t. The Forecasts cuts bait if a fund consistently trails its peer group and scores poorly in our fund-rating system.

With that in mind, we’re dropping American Century Heritage (TWHIX) and Heartland Select Value (HRSVX)from our recommended Growth and Conservative Portfolios.

Taking their place are Wells Fargo Advantage Discovery (STDIX) and Vanguard Selected Value (VASVX)—two category killers that consistently outperform rivals in both strong and weak markets.

To make the cut, the US stock funds needed to rank among the top 50% of their respective categories over the last one- and five-year periods based on total return. To uncover consistent winners, we looked for funds that outperformed peers in at least three of the last five calendar years.

Finally, we screened for funds with below-average expenses that score above 80, ranking them among the top 20% of their category.

Wells Fargo Advantage Discoveryranks among the top 12% of its peer group for three-, five-, and ten-year total return. Boasting an impressive fund score of 91, the fund invests primarily in midsized companies with a growth slant. The fund is up 13% so far in 2012.

Vanguard Selected Value, which earns a solid fund score of 81, held 64 names on December 31, with financials representing 28% of the portfolio, followed by industrials at 10%. The fund ranks among the top one-third of midcap value funds for five- and ten-year performance. The annual expense ratio of 0.47% is below the category average of 1.38%.

Other category killers include:

Buffalo Growth (BUFGX)
Dreyfus Small Cap Index (DISSX)
Homestead Small Co. (HSCSX)
T. Rowe Price New Horiz. (PRNHX)
Vanguard Dividend Growth (VDIGX)

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