Cents and Sensibility


Saturday, June 9, 2001

Look beyond fund’s

past performance

IF you've ever noticed an ad for a mutual fund, you've probably seen, in a large typeface, some numbers indicating how well the fund has performed in the past few years. The message is clear: This fund is sizzling; and you should be investing in it.

But then, way down at the bottom of the ad, in tiny type, are the words: "Past performance is no guarantee of future results." This isn't just a legal disclaimer -- it's the truth. What a fund has done may not be a guide to what it will do. The factors affecting a mutual fund's performance today may be quite different from those of the past, so it's never a good idea to rely on history as an investment guide.

If you don't base your mutual fund investment decisions on previous performance, how should you evaluate prospective funds? You'll want to consider a variety of factors, including the following:

>> Fees and expenses -- If you purchase a fund that has high costs, it must perform better than a low-cost fund to generate the same returns. Before you buy a mutual fund, review its prospectus to evaluate its fees and expenses. Then, see how these costs relate to those of comparable funds. You may find you can get a better deal on a substantially similar fund.

>> Age and size of the fund -- Newly created or smaller funds sometimes have excellent short-term performance records, which can be misleading. Because these funds may invest in a small number of stocks, a few successful holdings can weight the overall performance. But as the fund adds more stocks, the effect of these winning holdings will be diluted and performance may decline. To learn about a fund's age or size, read the prospectus.

>> Volatility of the fund -- All stock-based mutual funds fluctuate in price. But some stock funds are far more volatile than others are. Generally speaking, the more volatile a fund is, the greater the investment risk. If you plan on selling some shares of a fund within a year or two, you may want to stay away from the volatile funds, because they might be down at the time you want to sell. By reviewing a mutual fund's prospectus and annual report, you can see how volatile it has been over time.

Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at:

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