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Stock-Fund Performance Suddenly Looks Better

New York ( TheStreet) -- The 10-year track record of many stock funds improved dramatically recently. The average large blend fund returned 7.3% annually during the decade through September, according to Morningstar.

A year earlier the category had only returned 2.2% annually for the previous 10 years. The 10-year record of small value funds jumped to 10.2%, up from 6.7% a year earlier. The returns climbed because the market has rallied sharply in the past year. In addition, some bad results from 2002 dropped out of the latest 10-year numbers.

The big shift in return data should serve as a reminder that it can be a mistake to focus exclusively on a single performance number. Just because a fund has done poorly in one time period does not mean that it lagged in other years.

Consider European funds, one of the least-loved categories in the current market. Damaged by the euro crisis, the funds lost 5.8% annually during the past five years, lagging the S&P 500 by about 5 percentage points.

But the 10-year return looks very different. Helped by some strong years early in the decade, European funds returned 10.0% annually in the past ten years, outdoing the S&P 500 by 2 percentage points.

These days many investors appear to be traumatized by the results of a single year, 2008, when the S&P 500 lost 37%. Since then investors have been dumping stock funds and shifting to bonds. But the move into bonds has clearly been a mistake, since stocks have outperformed fixed income by wide margins during the past three years.

Stocks of all kinds have outperformed during the past 10 years. While the Barclays Capital Aggregate Bond (AGG) index returned 5.3% annually during the past 10 years, mid-cap growth funds returned 9.4%, and real estate funds gained 10.5%.

Bears note that the S&P has made little progress since technology stocks collapsed in March 2000. That's true enough. But helped by reinvested dividends, the S&P has returned 4.5% annually during the past 15 years. If panicked investors consider the 10-year and 15-year returns -- instead of focusing on the results of the financial crisis -- they would be less likely to dump stock funds now.

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