Use Relative Performance To Help You Compare Mutual Funds.




Relative performance is a great tool to use to help you compare mutual funds.

Relative performance is merely a measure of how well a particular fund performed compared to all other funds in it's category over a period of time.

I look for a fund that, compared to it's peers, has ranked in at least the top 25% over several time periods. I put more importance on the longer time periods.

Now understand that just because a particular fund may rank highly in it's category for various time periods, that is not a guarantee that it will never lose money over a certain time period in the future.

In fact, it is unreasonable to expect any investment to make money all the time. At some point, and for some period, every investment will lose money. In other periods, the same investment will make money.

The goal is to make sure that your fund is not one that loses money consistantly.





Therefore, the question we should ask is...

For each period studied, did the fund perform as you would have expected it to perform. And, is that performance acceptable compared to it's peers?

Consider this...

It is a known fact that rising interest rates cause bond prices to drop. Therefore, when we are in a period of time when interest rates are rising, you should not be upset that your bond fund suffers a loss. However, you should be upset if it's loss is significantly larger than the losses suffered by most other bond funds.

Your requirement should be for each fund in your portfolio to perform in an acceptable manner relative to it's peers and the market's environment.

If so, do not be upset at the funds if the overall performance is not on target to meet your goal. Instead, change either your goal or your allocation.

One last note before we move on... the older the fund the better. Even though past history does not guarantee future performance, it is better to have historical data than no data at all.

I prefer my funds to be at least 20 years old and would never invest in one any younger than 10 years old. A 20+ year old fund likely has weathered a full cycle of the market. Younger funds have not.




So, in review, use Relative Performance to help you compare the performance of similar funds over various defined time periods.

The goal is to identify funds that have... consistantly ranked in at least the top 25% across multiple time periods. Funds that have... performed in an acceptable manner based on the market's environment. And, funds that have... performed as described for at least 20 years or more.

Relative performance is a great tool to use to help you compare mutual funds in order to be able to either include or exclude a fund from your list of possible investments.

"Because It Matters"... Jim

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