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Ask Julie

Mutual Funds:
How to Benefit From the Pas

Imagine that you are driving a car, and that, instead of looking through the windshield to see what lies ahead on the highway, you were only able to look in the rear-view mirror, showing you the road you had already traveled. Crazy thought? For a driver yes, but not for an investor in a mutual fund. Whether we are investing in funds within our 401(k) plan at work, or we buy individual shares of a company in the open market, we have to make financial decisions using only the tracks that have been left behind, without any guarantee of what lies ahead.
I want to help you make better sense of some of the numbers that may be the most significant when anticipating the road ahead in your mutual fund investments. I need to remind you that past performance does not in any way guarantee future returns, but if we learn to understand the general behavior of a mutual fund in previous years, we may be better prepared to ride out the short-term volatility that we are bound to find along the way.
Something called a Bear Market Decile Rank can help. A bear market occurs when the price of a given index such as the S&P500, the Russell 2000, or any other—falls from its highest point by at least 20 percent. A drop of less than 20 percent over a short period of time is considered a market correction, and if the fall occurs in one or two days and its magnitude surpasses that magic percentage of 20, it is said to be a market crash.
Let’s say that you are shopping for a mutual fund and that in looking at the total returns over the past three, five and 10 years, you find that the fund has managed to keep its investors very happy with positive, and in many cases, double digit returns on their money. But, since you are looking at average, wouldn’t you want to know how that same fund held its value during the worst times in the market in the past five years? Well, you can.
If you go to www.morningstar.com, type your fund symbol in the box on the upper left side of the page, next to the word “quote,” and take a look at the mutual fund report on your screen, you will be able to go to the “Risk Measures” section of the report in the navigational bar.
Once there, you will find a line with a subtitle of Bear Market Decile Rank. This nifty measurement will show you in a range from one to 10—one being the best—how that mutual fund has held its value during the worst time in the market in the past five years. If your fund has a grade of 1, it means that it is in the top 10 percent, and that it has held up its value better than 90 percent of all other funds during the last five years. Conversely, if you see a rating of 10, that mutual fund has crumbled in value more than 90 percent of all funds when the going got tough.
If you are a conservative investor, you might want to consider limiting your investing to mutual funds that sport a Bear Market Decile Rank of 1 or 2. However, if your returns are high overall, and the ranking grade of your fund is 9 or 10, you know that when things begin to slip marketwise, especially in the index that is best represented by your particular fund, you may wish to either add more money to your account, or perhaps cash in some of your earnings. In other words, you know that the road ahead may be rocky and your fund may lose a lot of its value, at least until things turn around in the market.
Now that the market is showing signs of weakness, it is a great time to check how solid your mutual funds are, especially if you have them in pension plans such as 401(k)s, IRAs or Roth IRAs. Depending on how long you have until retirement, the average yearly returns of the fund over time, and your own tolerance for risk, you may want to make adjustments to your account.
The past may not guarantee the future, but it can definitely help you understand your fund’s behavior and maintain a cool head during bad times. H

Listen to Julie Stav’s
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