Lower Your Expectations as Mutual Fund Performance Soars

Don't base investment decisions on misleading point-in-time returns


As you check out new funds or check on your holdings this month, you might get what seems like a pleasant surprise — five-year returns are way up. Take that mutual fund performance with a grain of salt, though. With October 2013’s end, five-year returns are now completely rid of the horrific month of October 2008, and the numbers are soaring artificially.

To give you a sense of how crazy the gains in performance will appear, consider some of the Vanguard funds I regularly follow. Vanguard MidCap Value Index Fund’s (VMVIX) five-year return is jumping from 12.7% to 19.6%. Vanguard 500 Index Fund’s (VFINX) five-year return leaps from 9.9% to 15.0%. Among sector funds, Vanguard Precious Metals & Mining Fund (VGPMX) goes from a loss of 6.8% per annum over five years to a gain of 3.3%, and Vanguard REIT Index Fund’s (VGSIX) five-year return more than doubles from 6.2% to 15.5%. Vanguard International Explorer Fund (VINEX), which showed a 10.2% five-year return in September, now has a 17.4% gain.

On average, Vanguard’s diversified domestic equity funds will see a wholesale 5.2 percentage point increase in five-year returns. Does it matter? Sure. Take 500 Index: At 9.9%, an investor starting with $10,000 would have over $6,000 in gains after five years. But compound that $10,000 at 15.0%, and your gains explode to more than $10,100.

And it’s not as if three-year returns will give investors pause. Those numbers are also astronomical.
11 11 13 rolling return Lower Your Expectations as Mutual Fund Performance Soars

The bottom line in my book is that you simply can’t rely on point-in-time numbers to tell you how a fund (or any investment for that matter) has performed. You need to use rolling returns — which is something I highlight in my newsletter on a regular basis — to understand how the typical investor, rather than one who invested only at the beginning of the point-in-time period, has done.  For the huge ‘gains’ in five-year returns, keep that salt shaker close at hand.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.

Article printed from InvestorPlace Media, http://investorplace.com/2013/11/mutual-fund-performance-soars/.

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