Mutual fund companies and asset managers will start touting their 10-year performance record with dazzling numbers. The marketers will try to lure you in based on their outsized performance. But, before you invest, dig deeper. Ask to see their 15-year track record. If they don’t have one, review their performance from 2008. How did the fund perform during the Great Recession?
These companies are rejoicing, as they should, because it’s March 2019 and they’re now able to report their 10-year track record without including the disastrous year of 2008. The bear market is finally in the rearview mirror for reporting purposes.
How significant is this change? Well, the 10-year average annual total return for the S&P 500 from March 2009 to 2019 has been 16.5%. By comparison, the 10-year return ending 2018 was 7.13% – a difference of 9.37%! Since 1926 the S&P 500 Index has averaged 10%, so the recent returns are well above the historical average.
Of course, the returns are what they are, but they’re exaggerated due to the sharp sell-off during the Great Recession when the S&P 500 Index fell 53%. The index bottomed on March 9, 2009 and then it went on an extraordinary run for the next 10 years, rising 317%! If, and it’s a big if, you invested $10,000 at this juncture it would be worth $41,750 today.
Despite these outsized gains a majority of U.S. Large Cap Funds still underperformed their index. In fact, only 10.9% of actively managed mutual funds beat their index over the past 10 years. The funds with the lowest cost did slightly better as 17.3% of this group beat the index. However, funds with high fees were destroyed as only 2.1% managed to do better than the market.
Here are a few suggestions to help you build a mutual fund portfolio.
- Invest in low-cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Adding Exchange Traded Funds (ETFs) from Blackrock or Vanguard will help keep your costs low.
- Diversify your assets across large, small and international funds. Adding bonds and real estate holdings will further diversify your portfolio.
- Build your portfolio around your financial goals and risk tolerance. These two ingredients will help determine your asset allocation.
- Time is your friend when investing in the stock market. A time horizon longer than five years should include a heavy dose of equity funds.
- Rebalance your investments once or twice per year. This will keep your asset allocation and risk tolerance in check.
- Review past returns for as long as the data is available on your fund. You can research this data on several sites including Yahoo! Finance, Morningstar, YCharts, or the Wall Street Journal.
- Analyze the fee structure. Avoid funds with a front-end sales charge, a deferred sales charge, or a 12b-1 fee.
- Incorporate a buy and hold philosophy. Don’t fret the daily fluctuations in the market or listen to the “experts” about the pending correction.
This past decade has treated investors well. What will the next decade bring? Who knows, but if history is a guide, it will be a good one. Stay invested my friends.
I can only control my own performance. If I do my best, then I can feel good at the end of the day. ~ Michael Phelps
March 20, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Past performance does not guarantee future results.
 YCharts – March 9, 2000 – March 20, 2019