What Are Some Indicators That Show If a Mutual Fund is Good?
A mutual fund might be considered “good” based upon its performance history, cost structure, stewardship practices and the experience of its management team. However, being good or of “high-quality” (which is the definition of good) won’t prevent a fund from going through periods of underperformance. Research has shown that even mutual funds with the best 10 year track records tend to experience periods of underperformance lasting not just weeks or months, but in most cases several years. For example, of U.S. large cap mutual funds which ranked in the top quartile for their performance over the past decade, 96% of them ranked in the bottom half, 79% ranked in the bottom quartile and 47% ranked in the bottom decile of their peer group for at least one 3 year stretch during their 10 year period of great performance. So for an investor to actually earn that top-ranking 10 year performance, they would have had to remain invested in the fund during the 3 year period it underperformed its peers. This study reinforces the importance of patience, and it shows that high-quality investments can recover from periods of poor relative-returns. We close with asking the question: Would you have the fortitude to stick with a high-quality mutual fund when its returns are lagging? Source: Davis Advisors. Total of 176 mutual fund managers from eVestment Alliance’s large cap universe whose 10 years average annualized performance ranked in the top quartile from January 1, 2000 to December 31, 2009. Past performance is not a guarantee of future results.
At Payne Wealth Partners our ultimate goal is to help each client live their best life and leave a powerful legacy, no matter what that may be. We know each family has their own unique set of challenges, dreams, and story, which we enjoy deeply understanding. We hope this simple question and answer blog post provides value to you and your family. It is our passion to answer important questions like these and we encourage you to feel free to ask us any questions you may have in the future.
Posted: July 18, 2014
Authored by: Chad A. Sander,CFP®
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