Look at how a fund performs in good and bad times
— -- Pretty soon, you'll be reading about your mutual fund's first-quarter performance and, like most of us, sobbing uncontrollably.
But there's nothing sacred about a fund's three-month performance — or three-year performance, for that matter. The stock market's cycles don't depend on the Earth's rotation around the sun, and your fund's performance doesn't, either. You should judge your fund's merits by its performance in up and down cycles. Fortunately, we have a good opportunity to do just that.
Let's be optimistic and say that the Standard & Poor's 500-stock index hit its bear market bottom on March 9. If that's the case, we have a stock market cycle. The bull market started on Oct. 9, 2002, and ended Oct. 9, 2007. Let's hope the market's March 9, 2009, low was the end of the bear market.
Ideally, you want a fund that will gain more than its peers in a bull market, and lose less than similar funds in a bear market. To find the best funds, we added two other requirements:
•Continuous management. The fund had to have at least one manager at the helm for the whole period. A fund's record doesn't mean as much if several skippers have been at the helm.
•Large assets. Nothing against small funds, but we wanted to look at funds that people were likely to have in their portfolio — and particularly in their 401(k) retirement plan portfolio. We looked only at funds with $1 billion in assets or more.
At first, the returns from the best performers don't seem terribly impressive. T. Rowe Price New Horizons gained 29.9% for the full cycle, which translates into an average annual gain of 4.2% from 2002 to 2007, according to Lipper, which tracks the funds.
But as market cycles go, the most recent one was a distinct disappointment. The Russell 2000 small-company stock index, for example, gained just 13.9% over the entire period. That's an average annual gain of 2.0% for the period. Other indexes fared worse: The S&P 500 lost 1.3% during the entire market cycle, including reinvested dividends.
Related Stories
ABC News Live