JUST PLAIN TALK: Dig deep when evalauting investments

Buz Livingston
Buz Livingston

Mutual funds can be overrated like football teams; consider the criteria used for the analysis. Notre Dame gets a pass every fall because of their gold helmets. The 2018 team didn’t live up to expectations, and while the current squad played valiantly against my beloved Georgia Bulldogs, their best performance was theatrical. The Fighting (Faking) Irish flopped better than World Cup soccer players.

The most popular timeframe, 10 years, for mutual fund evaluation no longer includes a bear-market for funds investing in large U.S. companies (large-cap). For the 10 years ending in mid-2019, large-cap funds returned almost 14%, but when looking back 15years, the return drops to around 8.5%, not shabby but a significant difference.

Morningstar uses stars to rate funds; their evaluation includes a blend of three, five and 10-year returns adjusted for volatility and compared to the risk-free return, U.S Treasury bills with more weight given for longer-term metrics. The top and bottom 10% get five stars and a single star, respectively. The next best and worst 22.5% receive four or two stars with 35% in the middle getting three stars.

For large-cap U.S stocks, the last 10 years for US stocks has been outstanding. Starkly juxtaposed with the 10 year returns is the 15-year period, which includes the Great Recession. The S&P 500 lost 37% in 2008 and almost 50% from 2008 through early March 2009. Funds investing in large-cap U.S. stocks have not been tested by a bear market, typically defined as a 20% decline, in the last 10 years; although the winters of 2015 and 2018 along with the springtime in 2011 came close.

In addition to being a period of outstanding returns, the last 10 years has been a period of historically low volatility. One way to measure volatility, not the only one and it has limitations, is standard deviation. From 1970 to mid-year 2019, the S&P 500 has a standard deviation of 18% compared with 12.5% for the last 10 years. The Sharpe Ratio compares a portfolio return with the return of risk-free investment like U.S. Treasury bills. For several decades, the S&P 500’s Sharpe Ratio has been around .5% but for the last 10 years the index’s Sharpe Ratio has more than doubled the historical average (1.05%). If the numbers confuse you, the bottom line is that for the last 10 years results have been especially juicy with lower risk. When comparing funds look at the 15 returns along with the bright shiny stars.

If your advisor picks individual stocks on the assumption they are smarter than Wall Street, be aware their acumen includes a massive dose of good fortune. It is critical to keep a measure of safety in your portfolio and in how you evaluate investments.

You can’t always get what you want but Buz Livingston, CFP can help you get what you need. For specific recommendations visit us online at or come by our office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.