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Getting the most out of mutual funds

By Dian Vujovich

Mutual funds have been around for about 90 years. Throughout that time span, investors who practiced a buy-and-hold investment philosophy —and if their holding period and fund choice were right on— likely reaped some handsome rewards. Those who expected quick returns or panicked when the markets were volatile and liquidated their shares no doubt had dramatically different results.

Dalbar, a Boston-based financial research and rating company, recently released a report showing various fund returns over time frames ranging from 12 months to 30 years. The results were nothing to rave about. In fact, so pitiful I had to contact the firm to find out what was up.

Here’s one for instance: In their press release, “Dalbar Pinpoints Investor Pain”, part of the chart in the release showed returns for funds over 30 years. For equity funds the return was 3.79 percent, asset allocation funds 1.76 percent, fixed-income funds under 1 percent (0.72 percent) while the S&P 500 returned 11.06 percent.

Results like that made me wonder why anyone would ever invest in a mutual fund for the long term. Come to find out, there’s more to fund investing for the long haul than one might imagine.

Lou Harvey, president and CEO of Dalbar, Inc. launched the firm in 1976. He explained the numbers presented were a result of looking at a variety of factors such has inflows and outflows of money into various fund types and changes in fund assets.

Do that math then throw in investor behavior and the fact that not all fund investors are the buy-and-hold type, and have a tendency to react to changing market conditions and liquidate their fund shares often before their individual investment goals are met, and it’s easy to understand why advertised mutual fund returns—-which are all based on past performance—-aren’t the ones most investors ever get.

Given those realities along with Dalbar’s research results, what’s the best advice Harvey has for fund investors and their return expectations? For openers, he said that they need to be prepared for changes and unexpected events in the marketplace—all of which will impact a fund’s performance.

Next, everyone needs to understand that the advertised performance returns aren’t going to be the ones they’ll receive. Time horizons, holding periods,fund picks, expenses and performance results have never been the same from investor to investor within the fund arena.

Finally, after their research is done, investment time horizons are in place and the appropriate fund selection(s) made, Harvey says, “Don’t second guess your fund’s portfolio manager. Stay put and allow the fund to do its thing.”


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