How Our 2nd Qtr Model Portfolio Performed

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The Nasty Truth About Mutual Funds Investing

Here are some facts that might make many fund investors question why they have chosen to invest in funds at all.

According to John Bogle, former CEO of Vanguard Funds, one of the most trusted authorities on investing in mutual funds as well as a strong advocate for ordinary investors, such investors typically get poor returns on their investments. How poor?

Between 1984 and 2002, the average stock fund investor made just 2.7% per year on their fund investments! Hard to believe isn't it? Yet this is for a period during which the S&P Stock 500 Index returned 12.2%!

Expressed somewhat differently, had the equity investor invested $1000 buy and hold in the average equity fund beginning in 1984, their investment would have risen in value by $4420 by the close of 2002, for a 9.3% return. But, folks, had he invested the $1000 in the S&P 500 Stock Index instead beginning in 1984, his profit would have been $7910.

But here's the biggest part of the problem: Since most fund investors tend to buy and sell as a function of mass psychology, which usually turns out to be wrong, the average equity fund investor does far worse over the years than the long-term results had he merely bought and held his funds. So, if we track the performance of the typical investor's $1000 made at the start of 1984, his profit would be a mere $660, or a shocking one-twelfth of that of the $7910 shown above for the S&P Index.

Note: If you doubt the accuracy of these figures, please see the July 8, 2003 Wall St. Journal (p. A16), which devotes nearly 1/2 page to Bogle's column.

How does Bogle account for this tremendous shortfall by the average investor? He attributes the first 3% of the annualized loss to the management fees, costs of the higher than 100% average turnover of stock portfolios, and other expenses incurred by the average fund. As a result of such hefty costs, the typical fund earns, as shown above, about 3% less than the Index.

And what about the difference between the 9.3% return of the average fund and the 2.7% earned by the average investor in those funds? Bogle attributes it to too many fund choices, the great majority of which are too undiversified to meet the typical investor's needs. Such, along with the emotions of "greed and fear", create an atmosphere whereby people are often tempted to make the wrong choices at the wrong times; that is, they are too avid to buy when they should be being more cautious, and too prone to sell out when things have been going poorly for quite a long time rather than selling just a small portion of their holdings, as I have advocated on this site. (Incidentally, several of the very kind of investment problems reported by Bogle have been dealt with in previous articles on my web site.)

So what can you do to get better results than those achieved by the average investor? (See comment below.)

Bogle is known for his support of index funds to reduce fund costs. We agree that this is certainly part of the solution. We also feel that you should choose fund companies and products whose management fees are among the lowest.

But, unfortunately, indexing to the S&P 500 would not have helped you a great deal during the last 5 years. And, unfortunately, human nature and changing financial and personal circumstances make it all the more difficult to hold any investment year after year for a decade or two, as would have been required to emulate the results above.

Even if you are confident in your own research or rely on data provided by a trusted resource, we still recommend that you consider how the above data might be affecting how well you are really doing in your investments, year after year.

In our Newsletter, we have tried to give you some low cost fund choices that we feel are particularly appropriate for the type of economic and overall investment climate we are in, which usually changes slowly from year to year. Although many people are skeptical that any investment program can consistently beat the S&P 500, we have done just that during the 4 plus years we have been publishing, although no one can expect to do it year after year.

You do not need to keep switching your investments to make use of a Newsletter. Perhaps you will get one or two ideas from our articles, recommended funds, and category choices that you can put to use. Virtually all of the stock funds and categories we recommend can be bought and held for the long haul! And our bond fund and category recommendations are also meant to be as competitive as possible with the S&P 500, during the period we recommend them, only with considerably less risk.

Our Longer-Term Recommended Funds

If by any chance anyone out there agrees with me (and, perhaps likely, Bogel too) that this is a problem that needs addressing if millions of Americans are even going to have any chance of retiring anywhere near age 65, and if you happen to have any contacts in the publishing/media field, I would appreciate it if you could call their attention to my material on this site on how ordinary investors can outperform the average investor. Thanks for any help you might be able to provide, not least of which also includes letting acquaintances know of this site!