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Disability forced retirement, and I converted my union individual account into an IRA at Fidelity. So far my six week term has resulted in a 5% return. I consider this okay even taking into account that I was 20% into bond funds that showed zero return for the period. I've switched two of them to equity funds.

My question is how do I compare returns or which index is best for comparison in general? I'm just getting started, so there will be many more postings to come. Suggestions and critical comments welcome.

To get the best benefit from the brilliant minds on this board <g> you'd need to describe the portfolio more specifically. The amount of detail is whatever you're comfortable with in a public space, but one would need to know what kinds of stuff you have now, in order to deduce what your experience is and what your expectations might be.

If you've gotten a 5% return in just six weeks -- and IF, repeat IF that return could be replicated all year long -- then you would beat most mutual funds on the planet (like, over 45% per year). Especially if that return was reduced by a negative return on the bond portion of the portfolio!

More likely is that you've lucked into the big rebound that the market has made in that time frame, after it was clobbered earlier. The following chart shows a grab-bag of varied funds in the past 3 months:

That's a Total Market Index Fund, a Real Estate Fund, a Small Cap Fund, and a Big Cap fund. As you can see, they were moving pretty much in sync in the past three months, and they were all up. In other words, it was not hard to make money in the six weeks you're talking about.

(For those who are curious, those same funds do not track each other so consistently in longer time frames, as shown by this chart:,ASVIX,DODGX)

This addresses your question about what to use as a point of comparison. The first chart I showed you makes it look as if it doesn't matter what you compare to. The second chart shows that you do, in fact, want to compare your apples to other apples, rather than oranges.

Far too many resources compare EVERYTHING to the S&P 500. That only makes sense IF, I repeat IF you begin your investing strategy with two major philosophical assumptions: 1) the belief that the total U.S. stock market is, and will always be, the best yardstick of investment performance, and 2) That the S&P Index is an accurate reflection of the TOTAL U.S. stock market.

We've argued the second point in this board recently and it devolved quickly into a catfight over statistics and personalities. So let's just say that the point is not universally agreed on by all people, and you should do your own research to decide your own view on the matter.

As for the first point, I find myself referring yet again to the article by Christine Benz at Morningstar last week. Nobody came up with a non-premium link to the text, so I guess I'll have to try to quote some of what she said here. I can't use much of it because it would exceed "fair-use" copyright rules.

Her title was "Ignore This Investment Advice" and its purpose was to challenge old assumptions about how to construct portfolios, etc. Among other things, she discussed weightings in international stock funds:

I've noticed that many advisors seem to recommend an allocation in the neighborhood of 15% to 25% of one's overall equity portfolio... The U.S. market is roughly 50% of the global stock market, yet most U.S.-based advisors--like their counterparts overseas--have an inclination to systematically overweight their home market for no apparent reason... ask yourself whether you have a good reason for sticking with a substantially smaller allocation to foreign stocks than they represent in the global market.

If you follow and agree with the logic here, you will find that comparing your investments only against a domestic stock index -- ANY domestic stock index -- would not give you an accurate idea of how your portfolio is doing compared to the full universe of potential opportunities.

What to do? Well, Morningstar's performance charts make an attempt, though not always successfully, to find a best-fit "category" or "style" for a given mutual fund, so you have something reasonable to compare against. There are many, many different indexes out there, and not everybody agrees on the proper category for a given fund. I used to compare S&P fund reports against M* fund reports, and it seemed like half the time those two sources had assigned a given fund to different categories. (Like one would call it Small Value, the other might call it Small Blend or even Mid Blend, or whatever.)

Don't let all that information confuse you, though. It is unnecessary -- and impossible! -- to be 100% "perfect" in choosing your benchmarks. The point is simply that you should make the effort. It is probably okay to go with M* for most things.

The reason your question is a good one is because any investment involves opportunity cost. Let's say you have $10,000 and have to choose between fund YYYYX, and fund ZZZZX. You choose the former. Over the next three years it has grown to $15,000 you figure that's not too bad, which it isn't. But then you notice that fund ZZZZX would have turned your $10K into $20,000 in that same time frame.

Please note: my way of defining these terms is idiosyncratic. Somebody may come along and say that the language is incorrect or whatever. But the point is still the same. Anytime you commit to a decision, you risk an "opportunity cost" when compared to some other decision that might have given a better return.

Early on, one has to get over the nagging anxiety of such things, or else risk developing an ulcer! <g> And there are many other examples. Let's say you do business with XYZ Conglomerated, Inc. You have a $10,000 service contract with them, you fulfill your end of the deal a "net-30" invoice. but XYZ is slow to pay. For some crazy reason, your billing department did not put a penalty fee on late payments, and XYZ takes 90 days to pay up. They give you every penny of the $10K they owed you -- but 60 days passed by when you did not have the use of that money.

Well, using results like those you reported in your message, you could have put that $10K into a good mutual fund and earned $500 on it over those 60 days. XYZ's tardiness cost you the opportunity to make that money. The cost of lost opportunities is one rationale behind late fees -- it reimburses the creditor for profit they could make by investing the money owed to them. (Although this does NOT excuse the many bogus or padded late fees being charged by many banks these days.)

Anyway, back to your questions. If I recall correctly, S&P's mutual fund reports had a star rating that was based not just on the up/down performance of the fund in an absolute sense, but also on its total return when compared to U.S. Treasury Bonds. My memory may not be precise on that, but it is a reasonable place to look for a baseline.

In other words, you can take your $10,000, buy U.S. bonds (5 or 10 year, whatever) and get somewhere north of 4% guaranteed annual return (as of this week). The only way you could miss that return is if you sold them on the secondary market before maturity, and accepted a price below face value. But let's leave that out.

Anytime the stock market looks like it's going to return less than bonds, it automatically makes more sense to own bonds. So, as you can see, the bond market is in fact a benchmark for stock investments, and vice versa -- because the bottom line is: how much return can I get on my investment, ANYWHERE?

Most people believe that the highest ROI is always in stocks, at least over long time periods. Even if you accept that, you still need to choose for yourself just what kind of benchmark to use in evaluating your return.

And if you accept Ms. Benz's argument -- that a savvy investor should weight his/her portfolio according to the weighting of stocks in the WORLD economy -- well, that *really* changes the picture! Rather than look for some global index that attempts to reflect such a strategy, I would suggest something else. To start with, you should be thinking about how to construct your portfolio, and how to diversify it, whether by asset class, geography, or whatever.

In that process, to evaluate individual fund candidates for purchase, you should be comparing them against *their own* best-fit index. That includes domestic *and* international stocks, as well as bonds and even stock sector funds. From that point forward, you check now and then to make sure that each fund is in the top quartile or so of its category; it may dip below that for 3-6 months, but beyond that I think one should consider replacing it.

After that, if you want to compare the total portfolio's return against something like the S&P500, nobody can stop you, and it probably would not be a terrible idea. This may reflect the quality of your portfolio strategy, as much as it does the choices of individual funds. In other words, just make sure that any "diversifier" funds are not dragging down the whole portfolio.

In any case, it is safe to say that simply comparing one's returns to the Champion Funds is far too limited an inquiry. That is *especially* true if you are unable to view the returns in multiple time frames, as you seem to be saying. Perhaps they are totally fabulous funds, I don't know, but if you can't get all their data, that's a pain.

I always look at annualized returns over 1, 3 and 5 years for any mutual fund. Sometimes funds are younger than 5 years, and unlike some folks, I do not discard them from consideration just for being young. However, I am more cautious with them.

I only look at ten year returns if I have a list of funds in which all of them are at least 10 years old, and if all of them have the same management for that whole time. Those two factors rarely occur, so it's somewhat moot. That's just as well, because I guarantee, there are many funds out there that get rated too highly because they're still riding on some huge success they achieved in (for example) 1996-2000.

That's my own personal bias, which not everybody shares. But I think most folks want to see performance that is sustained over time, without crazy volatility or exorbitant expenses. As for whether the performance is "good" enough, that's a matter of choosing what to compare against, with considerations like those I've described here.

Hope this helps!
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