Assuming that 2007 turns out to be a good year for the stock market, mutual fund managers will be happy to forget about 2002. What am I talking about? Well, according to this Wall Street Journal article ($), the most often-used gauge of mutual fund performance is the 5-year average. As of right now, the most recent 5-year period includes 2002, which was a bad year for the market. The S&P 500 Index lost over 22% that year. At the end of 2007, mutual fund managers will report their 5-year averages using the 2003 – 2007. It will make a huge difference in their performance numbers. As the graphic below shows, the average annual return of the S&P 500 Index was 6.19% over the last five years.
Now, if we wipe out 2002, the average annual return rises to 14.46%. That’s a HUGE difference!
Granted, the 2007 has just started and there’s no telling where the market will end up at the end of the year. If the market ends up down for the year, the mutual fund companies will have to start all over again!
One important thing that investors should take from this is to ALWAYS look at the long-term. Although five years is a lifetime to a mutual fund manager, five years IS NOT long-term in the eyes of an investor.