Comparing Mutual Funds

  Even before the recent correction in the markets at the end of August 2015 many people have always wanted to know if they have a good mutual fund in their portfolio.   Many think they might but, really don't have a good way to verify.
Some go after the high recent return, others have heard of the hold/wait principle.

  In as much as it is advised to hold and not panic just because the  S&P 500 or Dow Jones Industrial Average lost 5 % in one day, how do you know if one mutual fund is better then another, or a stock for that matter.


  I came to the conclusion that there are a couple of things that have to be looked at to help determine if one mutual fund is better then another.  First you have to determine your investment goal.
If it is short term (not likely that you are doing this in an IRA or 401(k) account), then the price is all that really matters. You want it to go up in value quickly and then dump it.  If you are planning on holding for a period of time,  say 10 years, you will need to factor in dividends.  I think I need to explain the importance.


  So you acquire a mutual fund back in the day and it has a NAV (Net Asset Value) of say 16.50.
10 years later you go to sell and it has a NAV of 20.50.  The value went up right?  On the other you are comparing with one that started at 23.50 and ended at 24.15.   The second fund went up almost nothing.
So the first is the better fund?  Not necessarily.




  By straight percentage increase the first fund is better.... until you factor in the dividend.
I originally tried to compare funds by the simple annual increase/decrease.  Seemed to work though I knew the final amount of the investment was not exactly accurate. I imagined it would be off by a couple thousand dollars depending on the data.  As with any stock or mutual fund you acquire a certain number of shares with your initial investment.  After a time you sell those shares hoping they have gone up in value.  But, what about a big stable, slow growing company like GE, GM, IBM etc.  You don't expect their value to change all that much, so why hold that stock for 5, 10 or 20 years?  It's because these stocks pay a dividend.  They share their profits with you the owner of the company.

  So if you have the reinvestment option turned on you acquire additional shares every time they pay dividends.  Each consequent payment of dividends increases your number of shares.  So you might have a very high final value of your investment if you have been able to increase the number of shares significantly.  The share price may have not gone up much but, it the number of shares has doubled you have more then if you go up a lot with minimal change in the number of shares.  Hopefully the principle is clear.

A stock or mutual fund that goes up only 5% but, doubles its shares will be worth more then the stock or mutual fund that goes up 20% but has not change in the number of shares.




So as I mentioned earlier, I had to throw out method of calculating only via the percentage change in a stock year to year over a 10 year period.  It just was not accurate.
I realized I needed the start price (NAV), end price and the price at each instance they paid a dividend since I'm assuming there is dividend reinvestment.
That way I could figure out how much my number of shares changes over time.

http://dividendmonk.com/wp-content/uploads/2012/04/reinvest_dividends.png

Take the following mutual funds - OSMAX and ODMAX.
Both funds from Oppenheimer with an emerging markets or international flavor.  Both are on their list of best overall.  So which would be better?
I generally start by checking out the provided rate of return - 1 yr. 5 yr. 10 yr. lifetime etc.
Then I check for any dividends.  if the rate of return is ok but no dividend forget it.  Remember I'm in it for the long haul not the short term.

On the face of it ... either could be good.  ODMAX even though it has a change in NAV which is smaller then OSMAX he does have some large dividends.  You have to dig into the numbers or create the calculation to find out who will have the larger final value.  Turns out the high dividend payments don't secure the deal.  There is a difference of about $3,000 when all is figured out.
Though ODMAX only had a change of 29% compared to 95% for OSMAX.
Dividends do make a big difference.....  the smaller change was offset by a couple of large dividends.

See the chart below and notice how the number of shares becomes important.

Programmed by Mark-David McCool

Want a copy of the program?  Just let me know via a comment..... I'll gladly share so you too can have a half a chance of picking a better stock or mutual fund.  Remember though we never can predict when a correction or dip is going to come along.  This just gives you a chance to get a better fund based on past performance.........

You need this information if you are not lucky enough to have tapped into The Dirty Little Secret.

Buaidh - NO - Bas