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| Mr Biz on DougStephan.com |
BOCA RATON, FLA. (Dec.
4, 2002)--When it comes to long-term mutual fund
investing, perhaps it's best for most investors not to try to "reinvent
the
wheel."
The "wheel" which keeps the markets rolling, in this case refers to
the
old, "Plain Jane," diversified, investment-grade, common stock mutual
funds.
Also in this group of funds which can actually show you a 40, 50, or 60-year
track record, are so-called equity-income, balanced, growth and income, and
total return funds.
An analysis of the mutual fund industry's recent performance in the Dec.
2nd edition of The Wall Street Journal, confirms my longtime uneasiness with
"index," "sector," and other niche funds which attempt to
recreate the truly
amazing long-term success of the Plain Janes.
Most of the major fund groups: Fidelity, Delaware, Putnam, Oppenheimer,
Vanguard (Wellington), Invesco, etc have an "original" fund which
might date
back to before World War II.
The purpose was not to duplicate an index such as the Dow or the S&P 500,
but to take the peaks and valleys out of the market's volatility, and
outperform any specific sector, year after year.
Thus, in the Great Depression Fund X might have held 12% in retail and
15% in mining and natural resources; after Pearl Harbor perhaps they might
have underweighted retail to 9 per cent, but increased raw materials to 22
per cent. Get the idea? Professional managers chose the "sectors"
instead of
teachers, truck drivers, retirees, and day-traders trying to play at asset
allocation.
According to Lipper, cited by the WSJ, if you dumped your money into the
Vanguard 500 Index Fund a year ago, you lost 19.31%. You might say a -19%
return in a year in which Fidelity Magellan was down 21 per cent isn't that
bad. But is -21% vs -19% your only choice?
Vanguard's Wellington Fund, an old "Plain Jane" fund was down only
6.86%
year-to-date. More importantly, even with the last three miserable years, the
Wellington total return for the past five years was +5.05%. Not only is this
double CD rates, quadruple money market rates, but it's worth much more to
you if you used a clone of this portfolio offered in many Flexible Premium
Tax-Deferred Variable Annuities, even after all mortality fees are deducted.
Vanguard 500 Index, by contrast, average +0.52% for each of the past five
years.
American Funds Growth was also down for the year thus far, -18.01 per
cent, but not only is it positioned for a rebound, but if you are a long-term
investor, your results here for the last five years are still +8.73. It is
notable that in a broad market rally, this fund was +4.12% in November, while
the Vanguard 500 was +3.26%.
If a pure "growth" fund still has some high flyers which you are
uncomfortable with, look at a fund such as Delaware Decatur Equity Income
which is down 13 per cent for the year, but still showing a 10-year return of
+8.2% per year. Obviously, three straight down years hurts the
+statistical
averages for many funds, but most conservative investors nowadays will be
pleased with 8 per cent results on average.
Finally, as a group, large cap stock funds and mid-cap stock funds were
up 3.93% and 7.59% per year, respectively, for the past five years.
Over the same half decade, Dow Jones growth stocks were -4.78% per year;
Dow Jones value stocks +2.05% per year, and the entire S&P 500 Index +0.54%
per year. Total Return type "Plain Jane" funds were +2.28% per year
for the
five years, not great, but about five times better than the S&P Index.