Mutual Funds
7 Sure Ways to Bigger Returns
Are your mutual funds suffering from the blahs? It's time to whip them into shape. Start by putting your portfolio on a diet -- by dumping the slackers and asset-bloated funds -- and adding some energetic new replacements.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, September 2005
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7. Stay ahead of the trend
Sometimes it's best to take a deep breath and invest in funds with uninspiring, if not lousy, records. Now is one of those times.
Funds that invest in large fast-growing companies have, for the most part, performed poorly the past five years. (On average, large-company growth funds lost an annualized 8% during the period.) At the same time, funds that invest in undervalued stocks of all stripes performed admirably. But the tables are likely to turn soon. Growth stocks, a group that includes many technology companies, are now about as cheap as they get relative to value stocks on such measures as price-to-earnings and price-to-sales ratios.
So this is a good time to place a little more than usual in large-company growth funds, even if their five-year returns are in negative territory, as most are. Solid choices include Marsico Growth (MGRIX) and T. Rowe Price Growth Stock (PRGFX).
How should you normally allocate your money? About half of the money you earmark for stocks belongs in large-company funds, evenly split between growth and value styles. Another 25% should be in a foreign stock fund or two. The final 25% should go into small-company funds, again evenly split between growth and value. How much you put into bond funds depends on how close you are to needing your money.
Indeed, most investors should decide on how to divvy up their money, then leave their funds alone. Sure, you want to dump the clunkers, as described above, and you want to rebalance your portfolio every six or 12 months. But jumping into a hot sector long after its rise has begun and then holding on past its peak, as investors tend to do, leads to inferior performance, as a recent Morningstar study underscores.
Morningstar found that investors consistently earned less than funds' stated returns. In the case of large-company growth funds, investors, on average, earned 3.4 percentage points per year less than reported returns over the past ten years. With more-volatile technology funds, investors' returns trailed by a stunning 14 percentage points per year.
What accounts for this discrepancy? Simple. Driven by reports of fantastic results, investors typically pile into a hot sector after it has achieved most of its gains. By the time they've joined the party, the sector may be on the verge of heading down. The lesson: Take emotion out of investing decisions.
--Research: Jessica Anderson