Funds Returns Change Over The Years

by Alan Lavine and Gail Liberman

How quickly mutual fund performance numbers change!

At year-end 1999, for example, large company growth stock funds were the darlings. They grew at an 18.63 percent annual rate over 10 years, according to Morningstar Inc., Chicago. Growth funds invest in fast-growing companies with earnings of 25 percent or more annually.

Small company value funds, which invest in small companies at eaten-down stock prices, lagged. They grew at a 13.46 percent annual rate over 10 years ending in 1999.  However, if you bought those high-flying growth stock funds at the end of 1999 based on their great returns, you would have lost your shirt! Growth stock funds, on average, lost a total of -28 percent in 2000 and 2001.

Meanwhile, if you stayed away from small company value funds because of their lower returns, you missed out big-time! Over the past two years ending in 2001, value funds were up 35.69 percent!

Now, look at how the 10-year picture has changed by year-end 2001. Small company value funds, the previous laggards, stole the show. They sported a 13.47 percent annual rate of return over the 10 years ending in 2001. Large company growth stock funds lagged at a 10.03 percent annual rate over the same period.

It just goes to show how much stock performance can flip-flop. What if you didn't buy your stock funds at the beginning of the calendar year? Sorry. There is no mutual fund performance service that calculates returns from exactly when you bought them. You have to figure it out yourself. 

Total return is a calculation that includes the change in share price of your fund plus the reinvestment of the fund's dividends and capital gains. If you have held a fund for 10 years or have been putting extra money into your funds, you'd need a computer program to figure out the true performance. There isn't enough room in this column to show you how to do it.

But there are a couple of ways to handle this problem. Once you have owned a fund for a full year ending on Dec. 31, you can check the newspaper tables for your fund's annual return starting in the next calendar year. This will provide a good idea how your fund performed for the previous year.

Or, as long as you have a well-managed fund, why not just keep putting money away so that you assets grow by a specific amount each year? For example, say you'd like to see your assets grow by 10 percent annually. That means, if you invest $1,000, you'd want $1,100 by the end of the year. You only have $1,050? Then, kick in $50 at the end of the year to bring your assets up to $1,100. Next year, you'd want your assets to grow another 10 percent to $1,210. But say the market took off and they grew to $1,300. You could give yourself a break. You wouldn't need to add anything that year.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.