Math doesn't lie. But which numbers you look at makes a huge difference in how you perceive the answers math gives you. Here's an ugly little math fact you should brace yourself for: Mutual fund average historical returns are plunging.
Given that the stock market, over many decades, has averaged an annual gain of about 10%, you're probably used to seeing good mutual funds post averages around there and often higher. But in fact, most mutual funds actually don't do as well as the market average, and in many cases the fees charged by a fund help to keep its returns below the average line.
What a difference a year makes
Check out these average annual gains for the respected Muhlenkamp (MUHLX) fund:
|
Timeframe |
Muhlenkamp |
S&P 500 |
|---|---|---|
|
1 year |
(9.7%) |
5.5% |
|
3 years |
0.5% |
8.6% |
|
5 years |
13.3% |
12.8% |
|
10 years |
9.0% |
5.9% |
|
15 years |
12.6% |
10.5% |
|
Since inception |
12.6% |
11.5% |
Data: Muhlenkamp Fund.
Here's the thing, though: Those numbers are all as of Dec. 31, 2007. You might not think that long-term average returns could change so much in just a single year, but check out the same data from a year later, as of Dec. 31, 2008, and see how much damage the grisly year of 2008 did to this fund's averages:
|
Timeframe |
Muhlenkamp |
S&P 500 |
|---|---|---|
|
1 year |
(40.4%) |
(37.0%) |
|
3 years |
(17.6%) |
(8.4%) |
|
5 years |
(5.5%) |
(2.2%) |
|
10 years |
3.1% |
(1.4%) |
|
15 years |
7.6% |
6.5% |
|
Since inception |
9.1% |
8.4% |
Data: Muhlenkamp Fund.
Note that it underperformed the S&P 500 by just a few percentage points in 2008, but the massive drop was enough to turn many of those positive averages into negatives for both the fund and the S&P 500. Another thing to note here is that the S&P 500 averaged a 1.4% annual loss over the past 10 years. So when we see a fund with, say, a 2% average gain, while that might seem kind of pathetic, it's actually a solid market-beating result at the moment. And the carnage may not be over.
What to do
In the coming years, remember that when you look at a fund's three-year, five-year, or 10-year average, good old 2008 will be tucked in there, most likely with a very grisly loss. That big loss will be enough to significantly drag down averages in funds -- and in stocks, too. Check out some recent 10-year average annual gains with ones from last year, and see how they dropped in just one year:
|
Company |
10-Year Average, as of April 2008 |
10-Year Average, as of April 2009 |
|---|---|---|
|
Dow Chemical (NYSE:DOW) |
6% |
(7%) |
|
US Bancorp (NYSE:USB) |
4% |
(1%) |
|
General Electric (NYSE:GE) |
4% |
(8%) |
|
Time Warner (NYSE:TWX) |
5% |
(18%) |
|
3M (NYSE:MMM) |
8% |
5% |
|
Legg Mason (NYSE:LM) |
12% |
0% |
|
Caterpillar (NYSE:CAT) |
14% |
3% |
Data: Yahoo! Finance.
You might want, therefore, to look at a fund's performance in a bunch of individual years. And regardless, be sure to compare its returns with an appropriate benchmark, which in many cases would be the S&P 500.
It's similar with stocks, too -- try not to look at just an overall long-term average annual return. Instead, look also at individual years and consider what was going on during them. You might look at General Electric's average annual loss of 8% over the past decade and imagine it losing that much each year. But that's not how it happened, and it doesn't mean the company will always lose value. In fact, a stock that has fallen far (and a mutual fund, as well) may actually be a bargain, with strong growth ahead.
The key lesson is simple: Don't let yourself be misled by averages.
