Stocks are soaring and nearing all-time highs. As they continue to climb a wall of worry, they’re leaving nervous investors stranded on the sidelines. I started thinking about the historical performance of the stock market and wondered why investors don’t buy the best performing funds?
After a quick screen of Morningstar’s database, I found the five best mutual funds over the past 15 years, and here they are:
Berkshire Focus Fund (BFOCX) has generated an average annual return of 15.25% for the past 15 years. A $10,000 investment in 2004 is now worth $81,300.
Fidelity Select IT Services Fund (FBSOX) has generated an average annual return of 15.34% for the past 15 years. A $10,000 investment in 2004 is now worth $82,790.
ProFunds Internet UltraSector Fund (INPIX) has generated an average annual return of 18.40% for the past 15 years. A $10,000 investment in 2004 is now worth $126,620.
Rydex NASDAQ 100 – 2X Strategy Fund (RYVLX) has generated an average annual return of 17.95% for the past 15 years. A $10,000 investment in 2004 is now worth $115,220.
T. Rowe Price Communication and Technology Investor Fund (PRMTX) has generated an average annual return of 15.37% for the past 15 years. A $10,000 investment in 2004 is now worth $84,950.
If you invested $10,000 in each of these five funds in 2004, your nest egg is now worth $491,611, a gain of 883%. By comparison, the S&P 500 generated a total return of 264%.
Why not put all your eggs in this high-octane basket? Good question. These high-flying funds have $10.8 billion in combined assets, which sounds like a lot, but that’s less than 3% of Vanguard’s S&P 500 fund, which currently manages $487 billion.
If these funds are so good, why don’t they have more assets?
The short answer is risk. The portfolio turnover for these funds averages 162% per year while the S&P 500 turnover is 4%. A fund with high turnover will generate short-term capital gains.
The beta for the portfolio is 1.36, or 36% more volatile than the S&P 500. If the stock market drops 10%, the portfolio will fall by 13.6%.
During the Great Recession, the best five fund portfolio fell 74%. Last December it dropped by 29%. In May if fell 11.5% and since August it’s down 8%. To harvest the gains, you must endure the rainy seasons.
Of course, hindsight is 20/20. It’s unlikely you would have picked these five funds in 2004 and held them for the past 15 years. It’s easy to pick winners while looking in the rear-view mirror.
And there are two sides to a coin. What if, instead, you picked the five worst funds for the past 15 years?
The five worst funds:
ProFunds Ultra Short NASDAQ 100 Fund (USPSX) has a 15-year average annual return of -29.96%
Rydex Inverse NASDAQ 100 2X Strategy Fund (RYCDX) has a 15 -year average annual return of -29.42%.
ProFunds Ultrashort Small Cap Fund (UCPSX) has a 15-year average annual return of -27.82%.
Direxion Monthly Small Cap Bear 2X Fund (DXRSX) has a 15-year average annual return of -27.48%.
ProFunds UltraShort Mid Cap Fund (UIPSX) has a 15-year average annual return of -26.54%.
An equally weighted portfolio of these funds generated an average annual loss of 28.24% per year. A $10,000 investment in 2004 is now worth $68.90, enough to buy dinner for two at a decent restaurant. Despite their atrocious performance, these funds still manage about $60 million.
The moral of the story. You won’t choose the best fund, nor will you pick the worst. Avoid leverage. Don’t short the market. Buy a diversified portfolio of low-cost mutual funds based on your goals and stay the course.
The benefit of hindsight is we only really talk about those things that did work out. ~ Jonathan Ive
October 15, 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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 Morningstar Office Hypothetical, 2004 – 2019. YCharts data 2004 – 2019.