Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

I will admit that putting a bear’s claw marks on the front cover may seem like an odd choice when talking about the five-year performance of mutual funds. Since the current bull market started in March 2009, the average large-cap fund has realized a 108.2% return. The average small-cap fund has fared even better, rising 138.1%.

What these impressive gains exclude, however, is the still painful plunge that occurred throughout 2008 and early 2009. When the analysis is widened to encompass the full five-year period of 2008 through 2012, the effects of the bear market are evident. During that time span, the average large-cap fund and the average small-cap fund realized annualized returns of just 1.1% and 3.4%, respectively. These lackluster returns are a reminder of just how severe the last bear market was. Five years later, the bear’s claws can still be seen.

Bond funds, of course, have prospered over the same time frame. The problem facing investors going forward is that interest rates are at historically low levels. Though yields could stay at low levels for an extended period of time, the easy money has been made in bonds and bond funds.

Thus, as you look at the list of the top-performing funds over the past five years, which starts here, keep in mind how the events of the last five years have impacted returns. The bear’s claw marks remain, but the scratch marks are healing. The consistency of performance and how the funds have performed on an annual basis should be the key areas of your focus.

Another key area of your focus should be your personal financial situation and your financial goals. Though there is no shortage of short-term market commentary and prognostication, success comes from tuning it out and sticking to your personal plan. To help you do this, I reached out to Carl Richards. Carl is a financial planner who has a talent for illustrating key financial concepts with simple sketches. He gives you five actionable strategies, and a few accompanying sketches, here.

Speaking of simplifying complex financial concepts, AAII’s Joe Lan continues his series on financial statement analysis. In his latest installment, Joe explains how to analyze growth rates. Joe also goes a step further and discusses what the evidence from our top-performing stock screens say about the pace of growth you should be seeking. You may be surprised by the findings. Joe’s article starts here.

While financial statement analysis can help you make better investments, where you hold the asset can determine your aftertax profit. An investment’s return characteristics, your intended holding period and your tax bracket all influence whether a taxable or a tax-deferred account offer you more upside. Kevin Trout, an adjunct instructor and lecturer at Coe College and the University of Iowa, respectively, explains the concept of asset location here.

A spreadsheet to calculate aftertax returns based on asset location created by Kevin is located in our Download Library at www.aaii.com/download-library/download?DL_ID=742.

We updated our tax guide on AAII.com in late January. Since many of you may have not seen the update or simply prefer a printed copy, I am including it in this month’s issue. The update covers the applicable changes made by the American Taxpayer Relief Act of 2012 and starts on page 29. A full version of the tax guide that includes updated 2012 tax tables is available online at www.aaii.com/guides/taxguide.

AAII Founder and Chairman James Cloonan has received comments from members expressing a preference for exchange-traded funds ETFs over mutual funds. Though he agrees that some mutual fund fees are too high, he also believes that mutual funds are still better for some strategies than ETFs. You can see Jim’s commentary and his latest Model Fund Portfolio update here.

Lastly, I want to invite you attend the AAII Investor Conference. The conference will be held on November 15 through November 17, 2013, at the Loews Royal Pacific Resort in Orlando, Florida. More information about the conference can be found on the inside back cover of this issue and at www.aaii.com/conference.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


Discussion

H Dannawi from Georgia posted 9 months ago:

iam amember with aaii for many tears.retired in 2005 and yet unable to form aconservative an asset allocation.many retiree they dont have million or two millions.what about those retiree that are not fortunate that their portfolio is not big enough.why the journal does recommend they are the expert to help the retiree to give them an idea where to invest in bonds or balanced funds.thanks


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