Imagine that a genie gave you one wish to apply to your mutual fund investments. Wouldn't wishing for funds that never lost money be a good idea? Well, perhaps not.
For one thing, a fund that gained 0% each year would technically be one that never lost money, but it wouldn't be a particularly wonderful investment. We don't have to be that extreme, though.
Over at TheStreet.com, Richard Widows listed the 10 funds he found that sported positive returns for each of the past 10 years. That seemed rather exciting and promising -- until I reviewed some specifics.
For starters, the funds tended to include a lot of bonds in them, along with stocks. This, over time, will tend to depress performance, since stocks outperform bonds over most long-term periods. On average, these 10 funds had only about half of their assets in stocks (though a few funds had two-thirds or more of their value in them).
More than half of the funds sported average annual gains of less than 10% -- that's in the same neighborhood as an S&P 500 index fund, which gained 8.3%, on average, over the past decade. Ideally, if I'm not investing in the index fund itself, I'd be aiming for significantly higher returns than it offers.
The not-so-amazing character of these funds was not lost on Widows, either. He listed some data for each fund, including grades each earned from TheStreet.com. Fully eight of them earned a C-, C, or C+. Only two earned A's. Some of the funds sport hefty loads, as well. The Delaware Dividend Income fund (FUND: DDIAX ) , for example, with top holdings recently including Baxter International (NYSE: BAX ) , Safeway (NYSE: SWY ) , and Mattel (NYSE: MAT ) , will skim 5.75% off the top of your initial investment into it (unless you manage to get the load waived).
What to do
So what should you make of this? Well, learn to look at the bigger picture when evaluating funds. Whether a fund has never (or rarely) lost money shouldn't be a paramount concern for long-term investors. Know that the market inevitably has its ups and downs, and prepare to take some lumps on your way to solid returns. Legg Mason's lauded Legg Mason Value Trust fund (FUND: LMVTX ) , for example, racked up average annual gains over the past decade of 12.1%. Despite that, it lost ground in three consecutive years (2000, 2001, and 2002), but still beat the S&P 500 index overall.
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