hompage
  • Banking
    Best Products
    • Savings Accounts
    • Money Market Accounts
    • CD Rates
    • Checking Accounts
    Calculators
    • Compound Interest Calculator
    • Savings Calculator
    • CD Calculator
    • Retirement Calculator
    • See All Calculators
    Popular Reviews
    • Bank of America
    • Capital One 360
    • Chase
    • Citibank
    • Marcus Goldman Sachs
    Read & Learn
    • America's Best Rates
    • Bank Fees Survey
  • Investing
    Best Products
    • Best Money Investment Options
    • Best Brokerages
    • Best Robo Advisors
    Calculators
    • Investment Calculator
    • Compound Interest Calculator
    • Retirement Calculator
    Popular Reviews
    • Ally Invest
    • Merill Edge
    • TD Ameritrade
    Read & Learn
    • Investment Quiz
    • Tax Preparation Fees
  • Personal Loans
    Best Products
    • Best Personal Loans
    • Debt Consolidation Loan
    • Home Improvement Loan
    Calculators & Guides
    • Personal Loan Calculator
    • Boat Loan Calculator
    • Guide to Personal Loans
    Popular Reviews
    • Best Egg Review
    • LendingClub Review
    • Lightstream Review
    • Payoff Review
    • Prosper Review
    • SoFi Review
    • Upgrade Review
    • Wells Fargo Review
  • Credit Cards
    Best Cards
    • Best Credit Cards of 2023
    • Best Balance Transfer Credit Cards
    • Best Business Credit Cards
    • Best Cash Back Credit Cards
    • Best Rewards Credit Cards
    • Best Secured Credit Cards
    • Best Student Credit Cards
    • Best Travel Credit Cards
    Calculators
    • Credit Card Interest Calculator
    • Debt Payoff Calculator
Best Products
  • Savings Accounts
  • Money Market Accounts
  • CD Rates
  • Checking Accounts
Calculators
  • Compound Interest Calculator
  • Savings Calculator
  • CD Calculator
  • Retirement Calculator
  • See All Calculators
Popular Reviews
  • Bank of America
  • Capital One 360
  • Chase
  • Citibank
  • Marcus Goldman Sachs
Read & Learn
  • America's Best Rates
  • Bank Fees Survey
Best Products
  • Best Money Investment Options
  • Best Brokerages
  • Best Robo Advisors
Calculators
  • Investment Calculator
  • Compound Interest Calculator
  • Retirement Calculator
Popular Reviews
  • Ally Invest
  • Merill Edge
  • TD Ameritrade
Read & Learn
  • Investment Quiz
  • Tax Preparation Fees
Best Products
  • Best Personal Loans
  • Debt Consolidation Loan
  • Home Improvement Loan
Calculators & Guides
  • Personal Loan Calculator
  • Boat Loan Calculator
  • Guide to Personal Loans
Popular Reviews
  • Best Egg Review
  • LendingClub Review
  • Lightstream Review
  • Payoff Review
  • Prosper Review
  • SoFi Review
  • Upgrade Review
  • Wells Fargo Review
Best Cards
  • Best Credit Cards of 2023
  • Best Balance Transfer Credit Cards
  • Best Business Credit Cards
  • Best Cash Back Credit Cards
  • Best Rewards Credit Cards
  • Best Secured Credit Cards
  • Best Student Credit Cards
  • Best Travel Credit Cards
Calculators
  • Credit Card Interest Calculator
  • Debt Payoff Calculator
    Ad Disclosure
    Compare MMA Rates
Advertiser Disclosure: Many of the offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all account options available. Click here to go to our Editorial and UGC disclosure. *APY (Annual Percentage Yield).
Please enter the text to be searched

Exposing The Myths In Mutual Funds

Evaluating mutual funds can be tricky because their performance is often inconsistent. Learn how to derive meaning from their records.
mm
By Richard Barrington

Last updated: December 24, 2021
Our articles, research studies, tools, and reviews maintain strict editorial integrity; however, we may be compensated when you click on or are approved for offers from our partners.

To listen to mutual fund advertising, you would think that Wall Street is like Garrison Keillor’s Lake Woebegone, where all the children are above average.

The reality, of course, is not nearly so idyllic. The S&P Persistence Scorecard — a semiannual report on mutual fund performance over time — lends some insight into why so many funds can claim to be top performers.

Lack of persistence

Mutual funds are frequently grouped into quartiles, with the top 25 percent being the top quartile, the next 25 percent the second quartile and so on. The S&P Persistence Scorecard measures the ability of mutual funds to repeat above-average performance from one year to the next.

By this standard, mutual funds suffer from a pronounced lack of persistence. According to the June 2014 issue of the Scorecard, only 3.78 percent of mutual funds were able to sustain top quartile performance over three consecutive one-year periods, and only 0.28 percent — roughly one in every 400 mutual funds — were able to do the trick for five consecutive periods.

Even when funds were held to a less lofty standard, few were able to exhibit persistently strong performance. Looking at top half rather than top quartile performance, only 18.66 percent were able to stay above average for three consecutive one-year periods, and just 4.47 percent stayed in the top half for five consecutive one-year periods.

If mutual funds cannot consistently repeat their performance, does that mean that choosing funds based on their track records is just a crapshoot? Those track records may be less meaningful than the ads suggest, but the S&P Persistence Scorecard helps explain what past performance does — and doesn’t — mean.

What does it mean?

Here are some insights about performance measurement to be gleaned from the S&P Persistence Scorecard:

  1. Market conditions are rotational as well as cyclical. Besides up markets and down markets, styles and sectors of stocks move in and out of favor from year to year. Viewed from that perspective, the in-and-out performance of mutual funds is not so much disappointing as inevitable.
  2. Almost every dog has his day. The fact that funds seem to fall so quickly out of favor means other funds must be taking their place — but they too quickly fall from grace. So, if a mutual fund has a great year, it really is not a big deal — most get their time in the sun eventually.
  3. Performance measurement should be based on conditions, not calendars. The S&P Persistence Scorecard shows that besides being inconsistent from one single-year period to the next, funds have trouble repeating success over consecutive three- and five-year periods. That is because those periods don’t necessarily measure a representative range of market conditions. After all, the past five years have been dominated by a strong market — but wouldn’t you also want to know how a fund did in the devastating bear market that preceded that? Measure performance over a period that includes one bull market and one bear market phase, and not according to some tidy calendar-based period.

Long-term investing is like the baseball season — it is a long haul in which both good and bad teams are going to both win and lose a lot of games. Therefore, winning all the time should not be the standard. Winning more than your share and winning when it matters are what really distinguishes the champs from the chumps.

More from MoneyRates.com:

  • Need the best money market account? Heed these tips
  • Best banks in America: Is it time to switch?
  • Unconventional CDs: Are they right for you?
About Author
mm
Richard Barrington
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).
See Best MMA Rates 2021
top-reviews RELATED ARTICLES
When Opening Multiple Money Market Accounts Is A Smart Move
By Richard Barrington
IRA Money Market Accounts for Retirement Savings
BY Richard Barrington
2019 Outlook - 6 Factors Affecting Savings & Money Market Rates
BY Richard Barrington
Money Market Accounts Vs. Savings Accounts
BY Richard Barrington
Batter Up! 9 'Players' for Your Investment Line-Up
BY Richard Barrington
Home-Field Advantage - 7 Reasons to Favor US Stocks
BY Richard Barrington
7 Straightforward Rules for Asset Allocation
BY Richard Barrington

Home » money-market-account » Exposing The Myths In Mutual Funds

hompage
  • About Us
  • Contact Us
  • Privacy Notice
  • Terms of Service
2023 MoneyRates
Twitter
Advertiser Disclosure: Many of the offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all account options available. *APY (Annual Percentage Yield).
Editorial Disclosure: This content is not provided or commissioned by the bank advertiser. Opinions expressed here are author's alone, not those of the bank advertiser, and have not been reviewed, approved or otherwise endorsed by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program. To learn more about our approach to content and product assessments, visit our Editorial Policy and Product Assessment Methodology page.
UGC Disclosure: These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.
Information from third party sources deemed reliable but not guaranteed. Disclaimer: Because rates and offers from advertisers shown on this website change frequently, please visit referenced sites for current information. This website may be compensated by companies mentioned through advertising, affiliate programs or otherwise.
Do Not Sell or Share My Personal Information
2023 MoneyRates