Investment Newsletter #13 (Nov. 28, 1999)

Tom Madell. Copyright 1999

Can You Improve Your Investment Performance?

One of the main purposes of our previous Newsletters has been to suggest ways you might be able to improve your overall fund performance within the context of a diversified, long-term approach. In this article, I will present further data to illustrate the outstanding returns that have been achieved so far this year, especially if you have at least some of your investments within the categories of funds that have performed the best.

First, let's look at Morningstar data for the average median return for funds in the basic stock investment categories year-to-date (through 11-26-99) ranked in order of performance. (For those of you that have been following my earlier letters, I have not been very positive on bonds all this year; therefore, bond/balanced funds are not included. Suffice it to say that this year, bonds have not at all been the place to be. This will not always be the case in the future.)

As you can see from Table 2, many of the funds covered in this Newsletter have had an incredible year thus far. Furthermore, out of the 24 funds we own, 18 of them are ahead of the average performance for funds in their category.

The Paths to Success

Obviously, if you can consistently target your investments to funds that can beat their same category peers, in good markets as well as bad, you will be rewarded for the effort undertaken in locating these funds. Further, if you can correctly anticipate which categories of funds are more likely to do better using a timeframe of about a year or two ahead and overweight those categories within your overall fund allocation, you will also do better than if you make your percentage allocation choices just one time and stick with them regardless of changing circumstances. Finally, if you are able to recognize which funds and categories of funds may be temporarily undervalued and concentrate your current purchases on these funds, you may even be able to do better than the fund performance figures that are listed in the newspaper or shown on various web sites. An example of this latter point follows:

Suppose a fund shows a year-to-date return of 10%, with the NAV rising from 10.00 on Dec. 31 of last year to 11.00 now. But what if you were watching the share prices carefully and only bought your shares when you saw the price sink to 9.50 during the spring. Then your return for these shares from the date purchased to the current date is 1.50, your gain, divided by 9.50, your purchased price, or 15.8%, not the 10% shown in the year-to-date table.

On the other hand, suppose you had been thinking about buying the same fund about a year ago, but wanted to be more sure that it was really a good investment. So you waited. When you saw the price go down to around 9.0, you were glad you had postponed any action. But then when you saw the price go back up and reach 10.50 during the summer, you decided that you no longer should hesitate. So, having purchased your shares at 10.50, your return from the date purchased to the current date is now currently just 4.8%, worse than the figure shown in the table.

As time goes by, assuming no other purchases, your results will become more similar to the results shown in the paper. However, the investor who bought his/her shares at 9.50 will always have a better return than the one who bought his shares at 10.50.

What If You Could Do Just 1% Better Than You Are Now Doing?

Suppose you are able to do just 1% better down through the years on an investment of $10,000. What effect would this have on your projected results? So suppose instead of receiving an average return of, say, 11% on your investments, you were able to earn an average return of 12%. The result would be that after 10 years, you would have $2,664 more than you would have had with an average 11% return. (The actual projected returns as computed on an HP calculator are 31,058 vs 28,394).

After 20 yrs., the difference would grow to almost $16,000 (96,463 vs. 80,623). If you start with $100,000 invested, the results are ten times greater. That is, the 10 year difference would be $26,640; over 20 years, it would be almost $160,000!

So, it follows that if you can do even 1% better than you otherwise would, you will have substantially more money for your future needs, assuming you are invested over long periods of time.

Perhaps the information provided in these newsletters can help you by pointing to a small number of funds that we have researched over a long period. But perhaps even more importantly (since we dont expect everyone to necessarily own these particular funds), this information may to help you spot which categories of funds may be more undervalued than usual and possibly more likely to do better going forward than other categories.

Starting in January, we will begin to make available more specific information on asset allocation and which categories of funds seem to represent the best current opportunities to increase your overall performance in the year or two ahead. Although this information will continue to be free to anyone, it will no longer be posted on these pages; in order to receive it, you must first sign up. You will then receive it automatically by e-mail. You can do so by clicking on the sign up address list button shown on my main page.

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