Be Wary of Historical Returns

by | Mar 26, 2014 | Asset Management

Historical returns can sometimes convey misleading information to investors. In March of 2014, investors should be especially wary of mutual funds touting exceptional five year returns. Tom and Brendan discuss why funds are going to start promoting their five year numbers in this week’s Mullooly Asset Management podcast.

Take a moment and travel backwards in your memory five years. What was happening in March of 2009? We know that March of 2009 gave us our most recent stock market bottom. We also know that the market has gone up quite a bit since then.

How does this relate to our discussion on historical returns?

The fact that the five year anniversary of 2009’s stock market bottom has passed is extremely important to the mutual fund world. Moving forward, they’ll be able to advertise their five year returns without including numbers from the massive market dips that occurred in late 2008 and early 2009. That could make some of these mutual funds look pretty enticing, perhaps more enticing than they should really appear. They could also possibly be good investments, but we’d be silly not to warn investors of this information.

To illustrate what we mean by seemingly enticing returns, we can look at the S&P500 through the ETF SPY:

  • From 3/26/08 through 3/25/13 (5 years) SPY was up just +17%.
  • From 3/26/09 through 3/25/14 (5 years) SPY is up +124%.

Including 2008 and early 2009  numbers has a dramatic affect on the returns seen by the S&P500. The same can be said for almost any mutual fund you look at.

This March, many mutual funds went from posting lackluster five year returns to showing some pretty desirable numbers. This week’s podcast was intended to alert investors to this reality. Putting money into what’s currently working, not what worked last year or five years ago, is a more sound investing strategy in our opinion. That’s why we’re such strong believers in the relative strength concepts we discuss often here on the site. Looking at one, five, seven, or ten year returns is nice, but you also need to be cognizant of current market conditions and trends. So don’t let some mutual fund touting outstanding five year returns fool you. Do your homework and discuss the fund with your investment advisor before making any decisions.

Make sure to tune into this week’s Mullooly Asset Management podcast to hear more!

Check out this post from Business Week that also talks about five year mutual fund returns:

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