Mutual Funds Can Double Your Funds

Quick -- think of some companies that have made people rich over the years.

Wal-Mart (NYSE:WMT), which gradually emerged from rural America to dominate discount retail, probably springs to mind. So do Intel (NASDAQ:INTC) and Texas Instruments (NYSE:TXN), leaders in the superconductor boom. And on the strength of blockbusters like Lipitor, Zithromax, and Lyrica, Pfizer (NYSE:PFE) grew to become a major pharmaceutical giant, too. Over the past 20 years, all these companies have delivered impressive average annual returns:

Data from Yahoo! Finance.

Those rates add up to powerful growth, enough to double your money in short order. (Use the handy "rule of 72," and you'll see just how long it will take to double your money at those growth rates -- just divide 72 by the growth rate.)

With Wal-Mart's 15% growth rate, for example, a nest egg of $50,000 would have doubled four times over 20 years -- ending up around $800,000. If you had added to your nest egg during those 20 years, you would have ended up with considerably more.

But wait!
That's all pretty exciting, but there's a problem. How can you know which companies will turn in such results over the next 20 years? The more you study the market, the better your chances of answering this question correctly will prove.

Without such diligence (and even despite it, sometimes), you may end up with these performances instead:

Data from Yahoo! Finance.

Even those of us who read, think, and write stocks all day every day have fallen prey to underperformers. I've had some incredible winners (one early stock changed my life), and I've also seen many stocks not perform as I expected. (That partly explains how I lost $200,000.)

How to get the best returns
For my part, I've been investing more and more in mutual funds in the past few years. That lets me hand over the responsibility of deciding which stocks to buy and sell (and most importantly, when) to carefully selected professionals who know what they're doing.

Better still, I don't feel like I'm sacrificing much in the way of performance. It's often easier to find mutual funds with compelling track records than it is to choose superior stocks.

To find a great fund, I look for a manager who's been at the helm for a good while, who has a philosophy I respect, and whose long-term record -- in good markets and bad -- is strong. I also look for low fees and low turnover, which preserve returns and suggest that the manager has faith in his or her choices.

Check out the performance of these funds, during a period in which the S&P 500 was essentially flat:

*Data from Morningstar as of Oct. 31, 2008.

Now, compare those performances with the numbers from these funds, which have significantly shorter management tenure, higher expense ratios, and higher turnover:

*Data from Morningstar as of Oct. 31, 2008.

True, I chose those specific funds to make a point. But a number of studies have nonetheless shown that long tenure, low fees, and low turnover tend to produce higher returns for investors. The market's 10 best funds, for example, have above-average manager tenures and below-average expense ratios:

*Domestic U.S. funds, according to Morningstar.
**Simple average stock fund expense ratio. Data from the Investment Company Institute.

These are the kinds of factors we look for in our Motley Fool Champion Funds newsletter, where I've found a bunch of winning funds for my own portfolio. Even in this challenging market environment, Champion Funds' picks have been beating their respective indexes by three percentage points on average.

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