During the early 1990s, I was in business school -- and gaining surprisingly little practical knowledge about investing, I must confess.
I was, nevertheless, beginning to think of myself as a bit of a financial genius -- I subscribed to The Wall Street Journal, after all. And it was there that I read about one of best-performing mutual funds of 1993: Fidelity Emerging Markets (FEMKX).
Buying that fund represents several big mistakes I've made in my investing life. Here's how I described the investment back in 2000:
It was 1994 and I thought I was being smart. I read an article highlighting the amazing 1993 performance of Fidelity's Emerging Markets mutual fund. How amazing? Well, it grew an astounding 82%! I thought to myself, "Gee, I'd love to earn something like 82% per year. Even if the fund doesn't do quite that well again, it's probably managed by clever people, and they should surely be able to find some wonderful companies in which to invest in the many emerging markets out there."
Well, after earning 82% in 1993, the fund hasn't fared quite as well. In 1994: down 18%. 1995: down 3%. 1996: up 10%! 1997: down 41%. 1998: down 27%. 1999: up 70%. Had I left $1,000 invested from 1994 through 1999, I'd have ended up with about $650. I learned that mutual funds that do really well in one year often don't repeat that performance, and that one unusually strong year will inflate the average annual return that a fund touts in its ads for many subsequent years. I think I'll stick to index funds and individual stocks now.
The boo-boos
So what did I do wrong? Well, for starters, I got all excited about a mutual fund based on its performance in a single year. As Mark Hebner notes in, Index Funds: The 12-Step Program for Active Investors, "Only about 12% of the top 100 [mutual fund] managers repeat their performance in the following years."
Another mistake? I bought into the fund without knowing anything about mutual fund investing. I didn't examine its expense ratio (annual fee), or check to see how long its managers had been in charge, or evaluate its turnover rate, or read its prospectus.
Given that I had already amassed a series of mistakes, you won't be surprised if I claim I made another one: I sold the fund. That's right -- if you look at the fund's more recent returns, it seems that I'd have made out like a bandit by just holding on:
|
Year |
Total Return |
|---|---|
|
2000 |
(33%) |
|
2001 |
(2.5%) |
|
2002 |
(6.9%) |
|
2003 |
48.8% |
|
2004 |
22.9% |
|
2005 |
44.3% |
|
2006 |
33.4% |
|
2007 |
45.1% |
But those bandit-level gains are illusory, because the negative returns were sizable and they took quite a while to overcome. If I'd held on from 1994 through 2007, I'd have averaged an annual gain of only about 5.5%. That's respectable -- for a bond! Had I invested in the S&P 500 instead, I'd have roughly quadrupled my money from 1994 to 2007 -- instead of merely doubling it with this fund.
But the takeaway is clear: Different segments of the market move in fits and starts. The worst thing you can do as an investor is chase hot-performing areas and then sell them as soon as they underperform. That's a recipe for buying high and selling low -- the exact opposite of a sound investment strategy.
Where I am now
Still, Fidelity Emerging Markets has had a lot of very solid performances in recent years, with its five-year annual average hovering in the mid-30% range. That -- along with strong management and low fees -- explains why it's back in my portfolio.
That fund is only a small part of the portfolio, though. I have more money in the Vanguard Emerging Markets Stock Index (VEIEX) fund, which has a lower expense ratio and also sports five-year average returns in the mid-30% range. (Remember, though, that although the past five years have been spectacular for this category of fund, it won't always be this way.)
There are many other strong funds to choose from. Consider Meridian Value (MVALX), which sports a market-beating five-year average annual return of 15%, a relatively low (for its category) expense ratio of 1.08%, a 0.97% yield, and recent holdings that included Anheuser-Busch (NYSE: BUD) and Intel (Nasdaq: INTC).
Vanguard Total Stock Market (VTSMX) is a great broad-market index fund with a low expense ratio of 0.15%, a 1.9% yield, and major holdings such as General Electric (NYSE: GE), Verizon (NYSE: VZ), and Pfizer (NYSE: PFE).
If you'd like help zeroing in on some other great funds, Amanda Kish at our Motley Fool Champion Funds investing service can introduce you to many terrific opportunities. And trust me -- she looks at much more than last year's performance.
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Longtime Fool contributor Selena Maranjian owns shares of General Electric and McDonald's, as well as the Fidelity Emerging Markets and Vanguard Emerging Markets Index funds. Pfizer is a Motley Fool Inside Value and an Income Investor recommendation. Anheuser-Busch and Intel are Inside Value recommendations. The Motley Fool is Fools writing for Fools.
