The best thing that can be said about this year's up-and-down stock market is that it hasn't really hurt anyone. As investors waited for the outcome of the election and tried to factor in conflicting economic reports, an essentially flat market failed to give people a very good idea about where they should put their money.
That can be particularly frustrating for mutual fund investors, many of whom are taking their first steps out of bank accounts. With no clear direction, it's hard to choose that first mutual fund, to pick a "core" fund around which a portfolio of funds will be built or decide on a fund to include in a 401 retirement-saving plan.Perhaps a recent study from T. Rowe Price Associates, a Baltimore mutual fund company, will help. The study, which is supported by the performance of funds from Price and other companies, bolsters the time-tested notion that, over the long run, slow and steady often wins the race.
In the study, T. Rowe Price looked at seven down markets since 1961 and seven up markets since 1962. For each of those markets, the firm compared the performance of four different types of funds: balanced, equity-income, growth and small-company growth. Several dozen funds representing many fund companies were included in each category, so this was not a study of how one company's funds performed.
In six of the seven down markets since 1961, balanced funds or equity-income funds performed the best. Balanced funds invest in a combination of stocks and bonds; equity-income funds concentrate on dividend-paying stocks. While both categories lost money during these periods, they did not lose as much as growth or small-company growth funds. For balanced funds, the average return in bear markets was minus 16.4 percent; for equity-income funds, it was minus 17 percent; growth funds lost an average of 27.1 percent while small-company growth funds lost 30.7 percent.
Also, most balanced and equity-income funds recovered faster, taking from zero to 20 months to make up their losses, while the other two categories required four to 43 months to catch up.
Because balanced and equity-income funds are usually managed more conservatively, one would expect them to turn in a mediocre performance in bull markets. As the song says: It ain't necessarily so.
True, growth and small-company growth funds did have the best records in the seven bull markets, with growth funds reporting an average return of 132 percent and small-company growth funds gaining almost 160 percent. But balanced funds advanced 86.4 percent in those same markets, while equity- income funds were up just under 103 percent.
Considering the risks some people take - or are sold into - trying to chase the latest "hot" investment, gains of 86 and 103 percent aren't bad.
The total dollars earned in these funds aren't bad, either. Over the last 10 years, a $10,000 initial investment would have grown to $39,424 in the average balanced fund, it would have grown to $38,812 in an equity income fund, to $39,338 in a growth fund, and $34,857 in the average small-company growth fund. For the last 30 years, the accounts look like this: $10,000 grew to $147,153 in balanced funds, to $233,479 in equity-income funds, to $168,342 in growth funds and $217,272 in small-company growth funds. For the last 30 years, then, equity-income funds turned in the best average performance.
"The real lesson for investors in this is to pick a fund and leave it alone," says Brian C. Rogers, a fund manager at T. Rowe Price. Also, he notes, if a fund loses less money in a down market, it's easier for it to recover when things improve.
One reason balanced and equity-income funds hold up well against their more aggressive competitors is the nature of growth stocks, says Fred Reynolds, director of the investment marketing group at Fidelity Investments in Boston. "Market cycles change and growth stocks will be in favor, as they were for the last two years," he says. "But then, they'll be out of favor, as they have been this year." Sometimes, he notes, a good market for growth stocks will end very suddenly, as investors decide these stocks are overpriced, or get nervous about certain industries, like pharmaceuticals.
For these and other reasons, Reynolds says, "conservative investment styles often do very well over the long term."
This is, of course, a study of average performance, and individual funds and fund managers are going to beat or fall behind the averages, so it's important to examine a fund's performance in a variety of markets, over at least five, and preferably 10 years.