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Need to Know How Well Your Funds Have Performed? Try Benchmarking

While indexes are good methods of gauging how a mutual fund performs in relation to the overall market, they shouldn’t be the deciding factor in determining if a fund may meet your needs and objectives.

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How do you determine if your funds have performed well? One way is to benchmark them.

The right benchmarks can help you measure performance and assess risk characteristics of your mutual funds.

When you invest in mutual funds, how do you determine if your funds have performed well? Or if they are too risky or not aggressive enough?

One valuable tool is to compare your investment to its benchmark. Market benchmarks can help you determine how a particular market or market sector performs and can help you evaluate the risk and the return history of your investments.

The appropriate index for your mutual fund will depend upon the fund’s holdings; it is important to choose the benchmark that most accurately reflects your fund’s specific holdings. Most prospectuses, annual reports, and statements of additional information (SAIs) list the benchmark most appropriate for your mutual fund. Often, a fund that tracks more than one sector or asset class may list more than one index to reference.

Here are some of the more commonly used benchmarks.1

Money market funds: IBC’s Money Fund Report Averages, which provides the average for all major taxable and tax-free money market mutual funds yields for 7- and 30-day simple and compound (assumes reinvested dividends) yields.2

Bond funds: Barclays Capital U.S. Aggregate Bond Index, which measures portfolio performance relative to the U.S. dollar-denominated investment-grade fixed-rate taxable bond market.

Domestic stock funds: Standard & Poor’s Composite Index of 500 Stocks, which tracks 500 companies in various industries with a large amount of market capitalization.

Technology and sector funds: Nasdaq Composite Index, which is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.

International funds: Morgan Stanley Capital International’s Europe, Australasia, Far East (MSCI-EAFE) Index, which measures the equity market performance of developed markets outside of the United States and Canada.

Small-cap stock funds: Russell 2000 Index, which measures the bottom 2,000 stocks in the Russell 3000 Index.

When using benchmarks, keep in mind that benchmark indexes are not managed and do not reflect trading costs or fees, and investors cannot invest in them. Therefore, even index funds, which seek to maintain performance standards similar to the indexes they track, will usually fail to match the index performance due to these costs.

While indexes are good methods of gauging how a mutual fund performs in relation to the overall market, they shouldn’t be the deciding factor in determining if a fund may meet your needs and objectives. When evaluating a fund, ask yourself the following questions:

Does the fund’s objective seek to meet your investment needs?

How long will your money be invested in the fund? Though past performance cannot guarantee future results, consider the performance record of the fund over a similar time frame.

How well can you withstand fluctuations in the value of your investment over time?

Written by: Carl Trevison and Stephen Bearce

1The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indexes do not take into account any fees and expenses of the individual investments that they track and that individuals cannot invest directly in any index. Past performance is no indication of future results. Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.
2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2014 Wealth Management Systems Inc. All rights reserved.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Carl M. Trevisan, a local member of FPA and Stephen M. Bearce.
McLaughlin Ryder Investments, Inc. and McLaughlin Ryder Advisory Services, LLC and their employees are not in the business of providing tax or legal advice.  These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties.  Tax-based statements, if any, may have been written in connection with the promotion or marketing of the transaction (s) or matter(s) addressed by these materials, to the extent allowed by applicable law.  Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. 
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