Mutual Fund Trends & Research
Newsletter #26 (June 18, 2000)
Tom Madell. Copyright 2000
Everyone has too little time, but you should take the time to read this issue. We feel that this article has extremely important ramifications for deciding whether you should continue to be a market participant or not, and on your future financial health. No serious (or casual) investor should miss it.
I can understand why nearly everyone may be a little discouraged with their stock mutual funds so far this year. As a result, many people are losing interest in investing now that they realize that the great returns of the last few years aren't there any more. In fact, so far for the year, many peoples' stock portfolios are in negative territory, or at best, are hovering around a 0% gain nearly 6 months into the year.
In June 1999, in Newsletters #3 and #4, I wrote what I think were among the most valuable of all my newsletters. In them I showed how an ordinary small investor (me and presumably you too), can earn pretty amazingly big returns by buying and holding well researched funds over fairly long periods, using as data my own REAL investment results.
Note: The reason I often use my own results in my newsletters is because this enables you to see the effects of any mid-year purchases or sales. Such transactions can obviously never be reflected in the returns that are presented in newspapers or websites. They may more accurately reflect, then, the actual results that are achievable if you are successful at buying when prices are depressed and selectively selling some shares when prices are high and appear to be unsustainable at those levels.
In keeping with our longer term emphasis, and to put the so far lousy 2000 returns in perspective, I have just completed another long-term analysis. The results clearly show that this year's current returns appear as hardly even a blip when looked at from the perspective of from 6 to 10 or even more years of sticking with a high quality fund:
Portfolio Holding | Acct. Opened | My Avr. Annual | 1 Yr. Return |
|---|---|---|---|
| Vanguard 500 Index (Large Blend, 4 Stars) | 1/87 | 17.9 (18.3) | 11.5 |
| Vanguard International Growth (Foreign, 3 Stars) | 6/87 | 12.3 (10.5) | 25.6 |
| Janus Venture (Small Growth, 4 Stars) (Currently closed to new investors) | 6/87 | 18.9 (14.5) | 75.4 |
Janus Fund | 9/87 | 21.2 (19.9) | 36.4 |
Vanguard Extended | 3/88 | 16.4 (15.5) | 25.4 |
| Evergreen "Y" (Large Blend, 3 Stars) | 4/89 | 13.5 (14.1) | 9.0 |
Vanguard Windsor | 5/89 | 13.6 (14.9) | -2.8 |
Vanguard Growth | 2/92 | 20.2 (20.7) | 13.5 |
Vanguard Small | 3/93 | 16.0 (15.0) | 19.8 |
| Vanguard Europe Index (Europe, 4 Stars) | 1/94 | 18.0 (18.1) | 17.4 |
| Vanguard Pacific Index (Japan, 2 Stars) | 1/94 | +2.1 (-2.1) | 17.6 |
Vanguard Explorer | 6/94 | 18.2 (13.1) | 44.4 |
T. Rowe Price | 10/94 | 19.4 (19.1) | 22.0 |
Janus Overseas | 6/96 | 31.3 (16.3) | 75.3 |
American Century | 9/98 | 42.1 (32.8) | 50.0 |
T. Rowe Price | 4/99 | 3.5 (63.8) | -6.3 |
The important column to look at is the 3rd. By comparing the 1st and 2nd numbers in that column, you will see the impact on my cumulative long-term return of the last 12 mos. return, reflected in the first number but not in the 2nd number which is in parentheses. The first number obviously includes the lousy last 3 or so months.
As you can see, the total returns for the funds in the upper 2/3rds of the above list, those accounts opened more than 6 years ago, have for the most part hardly been affected at all by the last 12 mos. returns, except for a percentage point or two. So, for example, for Vanguard 500 Index, my total return dropped by only 0.4%, 17.9% vs 18.3%, for my actual results investing in this fund when calculated on 6-16-00 vs. when initially calculated in June '99.
In the case, however, of more recently opened accounts (those in the bottom 1/3rd of the list), one year's return frequently did have a much larger effect on my total return for the fund. So, for example, my T. Rowe Price Value fund originally showed a 63.8% return, but over only the 2 mo. period from when I opened it in 4/99 in which it did very well indeed. But, in the following 12 mos., it had a negative return as shown in the last column, completely changing my short-term result from great to pretty poor (3.5%).
These results then provide strong evidence that the longer you hold a fund, the less meaningful will be a relatively shorter period of bad returns in terms of reducing your total return.
Note: In several cases, my cumulative returns actually grew bigger in '00 than when they were calculated in '99 (that is, the first number in column 3 is bigger than the 2nd number). In this perspective, the last 3 months, while unpleasant, when looked at in terms of the whole year were only a "correction" to the otherwise good results shown in the last column.
But even this analysis is probably fairly trivial when you overlook the bigger picture of what these results show. As discussed in Newsletter #4 and in several other issues, every time you can average a 12% return for money invested and held continuously for 6 years, you will approximately double that investment. And for money averaging higher rates of return, the doubling will occur even more quickly. (This is calculated by dividing 72 by your annual rate of return; or, compute the "future value" of a fixed amount using a calculator or ask a financial planner to do it for you.) So, for money left in a fund averaging 18% continuously, it will take only 4 years to double, (eg 72/18 = 4), etc.
As you can see in the above table, all but one of the funds that I have owned for 6 years or more years have at least doubled all monies held in them for an entire 6 years, and in some cases, have doubled investments within less than 4 yrs. I am not willing to make a prediction that the same will happen over the the next 4 to 6 years because this has been a truly unusual period for stock investments. However, even if returns go down to average say 9% over the next decade (vs. perhaps double that in the last decade), you will still double anything you invest and hold in these funds in 8 years (72/9 = 8). Even this perhaps somewhat more typical return for stocks would certainly, to my way of thinking, be worth the investment effort.
So, in summary, do not let the periods in which stocks do not perform well discourage you from taking an interest in or continuing an investment program. The results shown above were achieved in a great variety of investment environments over the last 13 years including through the stock market crash of 1987 and the recession at the beginning of the last decade.
Notes: The results shown above include all stock mutual funds I owned continuously from the dates shown above to the present. Several other funds I owned are not included mainly "balanced" funds (those containing a mixture of stock and bonds) and those in my 401k plan which I didnt get to choose from a much larger pool, and those in a retirement annuity. I did close out a very small number of stock funds (maybe two or three) which either overlapped with others, or whose performance characteristics were not what I had expected. I also own a fair number of bond funds whose returns were in most cases less than reported above. (Long-term bond fund results will be reported in a later newsletter; or request to see Newsletter #16.)
Keep the faith!
Tom Madell, Ph.D.