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Sunday, February 8, 2009

What To Do About The Poor Returns On Your Mutual Funds

By David C Lewis, RFA

Getting a better than average mutual fund return might seem like an oxymoron to some people. This is because most actively managed funds have pretty poor performance. It's no accident either. Government regulations have spurred an industry that has become increasingly inefficient, and as a result, has shown investors little more than inflation-matching returns.

You can try to increase your mutual fund returns, however, don't expect these products to solve all of your retirement problems.

Your mutual funds are probably posting inflated returns. By not paying attention to historical returns that are posted by the fund company, and instead asking an independent adviser to help you calculate your true return, you'll get a better idea of how you're doing. The fund typically shows you the simple average instead of the compound average which will result is higher returns on paper. It's good for business but not for your portfolio.

A financial calculator can help you figure out the compounded return of an investment but, unless you know how to do that, you're probably going to have a hard time trying to figure out what return you are actually getting.

The second step in raising your mutual fund's return may be just to sell the fund. I know that's not really boosting the return of the fund, but you may be better off investing in something else. Actually, that's one of the basic rules of investing: understand what you are investing in. Unless you understand every business that that mutual fund holds, you are asking for trouble. You're not being a smart investor, you're just guessing.

One final point to consider is choosing mutual funds that invest in value stocks or smaller companies. Also, if your fund itself is small, that can be a big plus. If the fees are low, and the fund is small, under the right management you could end up seeing strong growth that will help your portfolio overcome years of lackluster performance.

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