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Performance reports differ from real life

- Alan Lavine and Gail Liberman

Do you really earn what your year-end mutual fund performance report says?

Probably not. Reason: You probably didn't start investing money in your fund at the beginning of the year. And you might have made periodic investments at different times of the year. So your returns are not the same as the calendar year returns stated in your local newspaper's mutual fund performance report.

In fact, investor average fund performance is a lot lower because people typically pour money into funds at the wrong time--after the stock market has long been surging. It's all too common to buy at the top of the market and sell at the bottom of the market.

A study by Vanguard Group founder John Bogle found that funds gained 8.9 percent over 10 years ending in 2005. But when he adjusted performance, based upon when the money actually went into the funds, the actual annual return was only 2.4 percent. Bogle surveyed 200 stock funds with the largest money flows.

Lesson: Don't chase the market. Invest regularly in your mutual funds.

If you've owned a well-managed fund for a number of years, it pays to stick with it during bad years, according to another study by Litman/Gregory Analytics LLC, Orinda, Cal. The company looked at more than 200 actively managed stock funds that have outperformed their benchmarks by at least 1 percentage point annually over the past 10 years ending in 2005. The study found that most of the funds underperformed their benchmarks for at least one three-year period. Half of the funds were 5 percent below their benchmark averages.

What can we learn from these studies?

  • It pays to invest in a mutual fund that has a long- term track record of at least tracking stock market averages.

  • You must invest regularly through thick and thin. That way your average cost will be lower than the market price when you sell.

  • You must stick with good fund managers.

  • You must diversify your investment. If you own stock funds, you also should invest in cash, bonds and international funds. Gains in one type of fund should help offset losses in others.

  • If you make a single lump investment, do it at the beginning of the year. That way your return will match the calendar year return.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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