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These days we're figuring out that the fund world's "buy and hold" mantra should come with an asterisk because it really depends on which funds you're buying and holding.
For years we've been told that no matter how bad things get in the market, you should make money if you hang on to a diversified stock fund for, say, at least three years. This seems sensible because otherwise we might be tempted to dump our shares in downturns and go on a buying spree in good times -- selling low and buying high, in effect. And a look at rolling three-year returns for the S&P 500 shows no down periods over the past 20 years, according to Chicago fund-tracker Morningstar.
But you'd be wrong to think you're bulletproof if you hang on for three or even five years. Plenty of stock funds trail the market by a wide margin each year and make bumbling a nasty and consistent habit. To prove our point, we've dug up a gaggle of bumblers in the growth-fund pack that have at least $200 million in assets and are in the red over the past one, three and five years.
How badly have these funds faltered? Each trails more than 90% of its peers over the past three and five years. Over the past three years, they have averaged an annual 9% loss; over the past five years they've averaged a 4% annual loss. By contrast, the S&P 500's gains over those periods stand at 6.5% and 13.4%.
A portfolio of these eight funds would have lost about 10% annually in the three years ended July 31. By comparison, if you'd simply bought the no-load
Vanguard 500 Index fund, which tracks the S&P 500, you'd have averaged a 4% gain over the same stretch.
If you're wondering, 78 of the 456 big-cap growth funds out there are under water over the past three years. That includes heavyweights like the $11.1 billion
Vanguard U.S. Growth fund and the $7.4 billion
Fidelity Aggressive Growth fund, which average 6.7% and 0.1% annualized losses, respectively, over the past three years.
"These funds show that people really can lose money," says Scott Cooley, a senior fund analyst at Morningstar. "If you figure in inflation, these numbers look even worse."
Source: Morningstar. Returns through July 31.
Some funds made this dubious cut because they have a high-octane growth approach, making outsize bets on the pricey stocks of tenuous tech shops that have been crushed over the past 18 months. Two examples are the broker-sold
Putnam Emerging Growth and the no-load
PBHG Emerging Growth funds, both of which have more than half their money in the ravaged tech sector, according to their most recent portfolio reports.
That gutsy approach led to fat gains in 1999, when the Putnam fund rocketed 127%, but it's down a whopping 73% over the past 12 months, erasing those gains. If the $3.9 billion fund rings a bell, it's a member of our
Ima Loser Fund Club and, regrettably, part of my own portfolio dating back to the mid-1990s, when I worked for Putnam. Yes, my account statements are waffled with tears, too.
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Other funds have sputtered thanks to a stream of management and strategy changes; some of these are being put out of their misery. The
John Hancock Large Cap Growth fund, for instance, is on its ninth management team in 10 years. And the
Merrill Lynch Growth fund actually had a price-conscious value style from its 1987 launch until Stephen Silverman took the reins early in 1999. Since, it has trailed its average peer in each of the past two years. Now it's set to merge into Merrill's
Fundamental Growth fund, which is one of our
It's somewhat alarming that funds like Putnam OTC Emerging Growth have had sporadic knockout years and drawn big inflows. It's also unsettling that many of these funds are offered by big, well-known fund companies and not obscure shops making oddball bets. The Putnam fund and the
Invesco Blue Chip Growth fund have nearly $5.5 billion combined, more than 10 times the average U.S. stock fund.
"You might not expect a Putnam or Invesco fund to implode, but that's what happened," says Cooley. "Even good shops can have problems."
The bottom line is that some may encourage you to blindly trust the buy-and-hold principle when it comes to fund investing, but it's just not a good idea.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.