Tag Archives: Performance
3 Small-Cap Funds Delivering Steady Performance
NEW YORK (TheStreet) — Small stocks were clobbered during the volatile markets of last year. In the third quarter, small blend funds lost 21%, according to Morningstar. For 2011, the funds lost 4.1%, trailing the S&P 500 by 6 percentage points.
Investors should not be surprised by the turbulent performance of small-cap funds. Many academic studies have shown that small-cap funds can be more volatile than large stocks. During rough times panicked investors can suddenly dump little-known small stocks and take refuge in giant blue chips, which seem like safer bets.
Although they come with risk, small stocks belong in nearly every portfolio because they can deliver strong long-term returns. Small-cap funds have ranked as one of the top-performing categories in recent years. During the past 10 years, small value funds returned 7.7% annually, outdoing the S&P 500 by four percentage points.
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Top 3 Reasons Chasing Past Mutual Fund Performance Can Hurt Your Net Worth
After writing about ways to improve your mutual fund performance, it occurred to me I hadn’t really gotten into the reasons that chasing past mutual fund performance can be such a terrible idea, leaving you with catastrophic losses. Many new investors have no idea that mutual funds can change portfolio managers, that the difficulty of finding good returning investments increases as the total assets under management level rises, and that many “good” mutual funds weren’t, in fact, good but instead rode the wave of a price bubble, such as dot-com stocks, real estate stocks, the “Nifty Fifty” or electric utilities. It seems as if every decade, a new type of company is en vogue and investors forget that it doesn’t matter if $ 1 of profit comes from sewage treatment plants or high-tech darlings, your return depends upon how much you pay for that dollar.
Honestly, I think the best option for most new investors – not all, but most – is to buy a low-cost index fund, regularly add money by having a steady amount taken out of a bank account, reinvest dividends, and hold it all through a tax-advantaged account. It may be boring. It may seem pathetically simple. But history has shown it works. Most strategies used by most new investors don’t. Just look at the data compiled by mutual fund research giant Morningstar, which showed that most investors earned only 2% to 3% on their money, while the funds they owned in their portfolios returned 9% to 10%. Why? The investors kept changing their minds, putting money in one hot fund then taking it out, transferring assets here, then moving them back over there. You can’t do that and get ahead. You just can’t do it.
It seems like for every investor that held a blue chip stock, such as Procter & Gamble, over the past 20 years, turning $ 100,000 into $ 1,200,000 with cash dividends, exponentially more attempted to trade the stock. They rented pieces of paper instead of owned businesses. That is, they hoped to profit off of other investors’ mistakes instead of the underlying earnings of the company in which they had an ownership stake.
This whole investing thing is incredibly easy once you have a successful enough career that your family is earning enough spare cash to pay your bills and have a little something left over at the end of the month. I know of a few doctors who lived middle class lifestyles and retired with $ 15 million to $ 20 million as a result of good stewardship, living below their means, and staying the course.
But let’s face reality: Those people are rare because most people are their own worst enemies. It’s true whether you are talking about finding a career that you love and pays well, losing weight, making money, saving money, or cleaning out the garage. For every dairy farmer that retires with an eight-figure net worth, for every Anne Sheiber amassing $ 22 million from her apartment, and for every Grace Groner building a $ 7 million investment position in her favorite companies, there are too many washed-out, left-behind, broke investors who want to blame Wall Street, society, their family, their friends, their bosses, their trust agent, their stock brokers, or even their dog. The fact? They have seen the enemy and it is them.
Why Do Investors Accept Poor Mutual Fund Performance?
Keeping on the same theme of the month, mutual fund performance, I wanted to address a question some of you have been asking. Namely, “Why would anyone accept poor mutual fund performance if they don’t have to do so?”. It comes down to four, key reasons:
- Not knowing what a mutual fund is
- Not knowing which types of investments a mutual fund owns
- Not knowing the benchmark to which to compare a mutual fund
- Not knowing there are less expensive mutual fund options
A completely inexperienced investor who can’t tell you the difference between a dividend and debenture is going to be lost when it comes time to put together a portfolio of high quality mutual funds. That is why it is so vital to educate yourself.
To help expand on these mistakes, I wrote a new article called Top 4 Reasons Investors Accept Poor Mutual Fund Performance. Why am I so passionate about the topic? Because every penny you give up to banks, brokers, and other expenses is not a penny lost. It’s more than that. You also lose all of the pennies, nickels, dimes, quarters, and dollars that the penny could have produced if invested long enough and allowed to compound.
Do yourself a favor, take a few moments to sit back in your chair, read the article, and educate yourself. Your pocket book, and your family, deserve better than to give your hard earned money to strategies or funds that don’t deserve your business.
Note: To save you from writing and asking, a dividend is when a company sends out part of its profit to the owners, the stockholders. A debenture is a word used to describe when a company borrows money from savers by issuing bonds, but those bonds aren’t backed by specific assets, only by the good faith and credit of the corporation. In contrast, a first mortgage bond on, say, a skyscraper would mean the bonds were collateralized by the building itself and no other creditor could come in and take the building from the bondholders.
Improving Mutual Fund Performance Is Fairly Simple
A few hours ago, I sat down and began writing a list of tips to improve mutual fund performance for new investors who wanted to know how to squeeze a couple of extra percentage points of return out of their holdings. The remarkable thing was, the more I thought about it, the more I realized that the secret lies in cutting costs so that more of the money in your investments stays in your family’s pocket instead of going to banks, stock brokers, mutual fund management companies, sales commission loads, and other “frictional” expenses. The difference in mutual fund performance between a high cost fund and a low cost fund is staggering over a long time period of 20+ years.
Why don’t most new investors know this? That is easy. They can’t even answer the question, “What Is a Mutual Fund?” so how on earth are they going to know what a mutual fund expense ratio is? Instead, they are likely to look at the literature sent out by the fund management company, peruse the charts in the glossy-paged sales literature, and go with the fund that has the best name or best track record, even though countless empirical studies have shown that past performance is no guarantee of future results. It is the nature of the industry now that pensions have gone by the wayside and there are easy fees to be made. It is the incentive system our society has set for the money management game.
Don’t misunderstand me. Sometimes, a fixed fee of, say, 1% or 2% can be useful if you have an investor who otherwise would destroy their family’s net worth through frequent trading, irrational concentration in specific stocks or asset classes, or just poor decision making. In such a situation, the steady hand of an experienced portfolio manager can add enormous value that far exceeds the cost of his or her fee even though such as fee must, by definition, lower mutual fund performance.
For example, I once heard a story of a young man who a decade ago lost a $ 5 million inheritance trading derivatives and options. He now works as a waiter for minimum wage. Surely, a $ 50,000 or $ 100,000 fee on his holdings each year (again, 1% to 2%) would have been an enormous bargain compared to the total loss of his capital. He could have been sitting at home or pursuing his passion, collecting $ 175,000 per year in cash dividends. But he lost everything, chasing after a little better performance. It’s asinine. Totally asinine and unnecessary.
Improving Mutual Fund Performance Is Fairly Simple originally appeared on About.com Investing for Beginners on Tuesday, October 18th, 2011 at 05:43:54.
