The Most Popular Stock Funds Have Missed Out

The majority of mutual fund investors do not appear to pay much attention to columns such as this when choosing and modifying their investments.

The reasons: Most fund investors are mainly interested in buying and holding their funds. Once they have made their initial choices, they tend to either hold on indefinitely or perhaps get out entirely when they see that they have done badly. And obviously, even the experts have proven to be frequently wrong when making recommendations. So why SHOULD anyone listen?

Another reality: Most mutual fund investors correctly do not attempt to measure their success in the short term. Rather, they usually wait for a significant amount of time to pass before coming to any conclusions as to whether their choices of investments and allocations were on target or off base. No matter how much the current evidence seems to support making certain investment decisions, it turns out to be nearly impossible to predict which funds will make better choices than others in the short term, that is, over periods of less than one year.

The majority of fund investors are trying to accumulate assets for long-term use such as for retirement or to prepare for college expenses. Most of these investors do not want to have to attend to their investments. Investors in individual stocks, by contrast, are sometimes investing for quicker profits and usually don't mind the extra work of monitoring their investments more frequently.

Given the above, it is not uncommon for mutual fund investors to look back over their investments ONLY after a year or more has passed. With that in mind, let's look at the cumulative performance of the 10 most popular stock funds during the period between Mar. 30, 2001 and Oct. 23, 2002:

Note: Most popular as of Jan. 2001

Thus, taking the average return from above, a typical mutual funds investor would have had a -18.62% cumulative return over the last 1.5 years.

Now let's look at how the 6 most popular bond funds have done:

This represents a +9.57% cumulative return over the identical period.

Since unfortunately, investors as a group had AT BEST ONLY about 20% of their assets in bond funds and about 80% in stock funds during the period, we can calculate their total portfolio return in these biggest funds at around -13%.

Suppose however an investor had bought and held my recommended stock funds beginning at the start of the above period as presented in my Apr 2, 2001 newsletter (see Letter 45.) The average cumulative return would have beaten the above 10 most popular stock funds by over 5%. Further, my recommended bond funds beat the above 6 bond funds by approximately 1% on average.

But even more importantly, our recommended allocations at that time were to invest ONLY about 50% in traditional stock funds with the rest in bond, money market, and real estate funds. This advice proved to be well-founded since stocks were clearly in a downtrend and the economy was showing signs of weakening, favoring bonds. (And even now, real estate funds represent only a fraction of mutual fund investments, yet are one of the few categories of funds that were up over the above period.) Even when sticking to the most popular funds listed above and excluding real estate, following such an allocation strategy would have resulted in beating the typical investor by about 8.5%.

So why should mutual fund investors pay much attention to the information I provide at my website? Because the above data (and additional longer-term data) strongly suggests that such recommendations, based on both a technical and economic analysis, can help investors do better than the typical investor.

Home