Years back, it made sense to mix and match mutual funds from different sponsors to build a portfolio. A decade ago Fidelity had no Ginnie Mae fund, no insured municipal bond fund and only one international fund. Vanguard had no Treasury funds and no California muni funds.
Even to assemble a portfolio of six funds, an investor might have had to buy from at least four fund companies, large and small. Result: a blizzard of paperwork, account statements with different reporting dates, tax documents that come in different formats at divergent times. In short, a mess that only an accountant could love.
It’s time to simplify your mutual fund life. Today you can do much of your fund shopping under one roof–or two. There’s still room for boutique funds from smaller, more specialized sponsors, but the bulk of your fund investments should be centralized for simplicity.
The five fund families profiled (See articles on Capital Research, Fidelity Investments, T. Rowe Price, Charles Schwab and Vanguard) offer a broad selection of funds with admirably successful long-term results and acceptable holding costs. In limiting the number of funds you own to a half-dozen or so, as we advise in the article “Enough already”, you should be able to find most of what you need at one or two families.
Our five featured fund families are a good starting place. With the exclusion of Schwab, which does not actively manage stock portfolios, these families have respectable records as stock pickers (See table “The best stock pickers”). More important, in our view, is that they offer a depth of investment choices at reasonable cost.
One of our families, the American Funds run by Capital Research & Management Co. of Los Angeles, is the best example that we know of to illustrate the virtues of moderation in investing. Despite their lack of superstar managers or hot performers, these funds are leaders over the long term.
When buying funds, don’t confuse short-term success with long-term durability. On July 6, 1995 the Strong American Utilities Fund ran an advertisement in the Wall Street Journal. “America’s #1 Utility Fund,” it boasted. Two weeks later Dreyfus advertised its Edison Electric Index Fund in the same paper. “The #1 Utility Fund,” bragged the Dreyfus advertisement.
Who was right? Both–and neither. The Strong was tops among 72 utility funds tracked by Lipper Analytical Services for the year ended Mar. 31, 1995. The Dreyfus fund had that honor among 75 utility funds in the year ended June 30, 1995. So the ads were true, so far as they went.
But during the 12 one-year periods that ended between July 1994 and June 1995, five different utility funds got to be number one at least once. Far from being some rare honor that brands a single fund as the best, being number one for the short term is no big deal. Indeed, the Dreyfus fund has a rather dubious claim on any championship. This supposed winner spent much of the past year in the dankest parts of the cellar; in 2 of the 12 periods, it was dead last among at least 50 peers (See table “Don’t blink or you’ll miss it”). No surprise it did not advertise its performance then.
Be warned, then: Short-term results are shockingly poor predictors of long-term performance. So are performance numbers considered in a risk vacuum. The past five years have been unusually bullish, with a 12% annual gain for the market (dividends reinvested). In such an environment, the “top” funds are the ones that took the biggest risks–by using leverage or buying growth stocks trading at steep multiples of their earnings. These are just the funds that will do the worst in a bear market, but if you pick your investments by looking at lists of “Top funds, past five years” you won’t find this out until it’s too late.
To help you sort out the confusing claims about performance, Forbes rates stock funds over three full market cycles, going back to June 1983, and we grade separately for bull and bear markets. The bear market grade is the most important measure of risk.
Unless you are highly confident that the bull market will continue for the next five years, avoid funds that do badly in bear markets. In all your fund investing, but especially in buying bond funds, pay attention to costs.
So far in 1995, the market is up 22%–returning more by this point in the year than it has in all but 5 of the past 15 complete years. This is just the time when you may be tempted to veer off on a chase after hot performance, regardless of cost or risk. We hope this guide will put you back on course.