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Information provided by mutual funds often refer to returns over time (5 years, 10 years, etc.) which seem unrealistic and have been calculated in some way to suggest superiority over the market indexes. What do they do and how can you tell if your getting accurate/reliable/comparable information?
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<<Information provided by mutual funds often refer to returns over time (5 years, 10 years, etc.) which seem unrealistic and have been calculated in some way to suggest superiority over the market indexes. What do they do and how can you tell if your getting accurate/reliable/comparable information?>>

Give me an example and I'll probably be able to answer better.

I suspect that mutual funds, in their ads, choose to show the returns that are rosiest. If they had a bad year six years ago, they might show average returns over the last 5 years. If they had a terrific year 8 years ago, they might show ten year returns.

They frequently might not compare their returns to the S&P 500 -- because most mutual funds fail to surpass it in performance. (And when I say most, I mean 75% to 95%, depending on what time period you're looking at.)

For example, a fund might brag of returns in the teens in the past years, which might seem very good to many people. Of course, if the S&P 500 rose about 20-25% per year in those years, the fund's performance is suddenly much less impressive.

Keep in mind that even an average return over 10 years, while it might seem very telling, is probably only based on 10 data points.

Consider this. Imagine this set of numbers:

5
44
12
10
16

Their average is 17.4. The outlier/unusually high number 44 is skewing the average.

If the set continues, so that it becomes:

5
44
12
10
16
11
15
18
14
9

Then the average is 15.4. Without the 44, the average of the remaining 9 is 12.2. That one high number is keeping the average much higher than it would otherwise be. If that was one blowout year in a mutual fund's history, the fund's average would be giving the wrong impression.

Hope that helps!

Selena
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