Profiting From Mutual Funds

wealth Mutual builders,funds can but be you effectiveneed to choose them carefully. For starters, don’t just jump into a fund with a strong recent performance. If a fund trounces its benchmark (such as the S&P 500) in a particular year, it’s not necessarily likely to beat it the following year. To some degree, a terrific return isn’t the result of the fund manager’s brilliance, but of good luck — at least over the short term. (And many fund managers invest only for the short term.) Few stock-focused funds have consistent returns — typically, they’ll have occasional outstanding years along with lackluster years. three-year,average,Don’t be either, five-yearswayedas that,by or a too, even fund’s can 10-yearbigbe because of one amazing year. After all, a five-year average is just an average of five numbers. If one is unusually high, the average will be high. If in each of five years, a fund earns respectively 5 percent, 12 percent, 3 percent, 9 percent and 36 percent, its average annual return will be about 13 percent. That might look respectable, but note that in reality it exceeded 13 percent in only one of five years. That 36 percent return (a statistical “outlier”) skewed the average. stock Believe mutualit or fundsnot, the fail majorityto performof as well as the market average (as measured by the S&P 500 index). According to Standard & Poor’s, as of the end of 2016, fully 83 percent of all domestic stock mutual funds underperformed the S&P 1500 Composite Index over the past 10 years, while 85 percent of large-cap stock funds underperformed the S&P 500. So what can you do? Well, consider investing in an index fund. If you can’t otherwise beat the average, you can meet it (and outperform most other mutual funds) by investing in a low-fee mutual fund or exchangetraded fund (ETF) tracking a broadmarket index such as the S&P 500. Learn more about mutual funds at fool.com/investing/etf/mutualfunds-v-etfs.aspx and research them at morningstar.com.