Portfolio 101

[lookout123]

has anyone taken the time to figure out why it is better to choose a solid fund with what seem like mediocre returns, compared to grabbing the best performers and running with them?

it's simple - the arithmetic of loss is devastating.

grab your calculator. this is an extreme example but say you are really aggressive (that is the only way to show HUGE gains on individual equities) - starting with $100K

1st year - 60% gain
2nd year - 40% loss
3rd - 60% gain
4th -40% loss

you would have $92K left.

a fund that only got 5% 3 out of 4 years and broke even on the 4th. 5% is half of what most decent funds are doing over a 10 year period.

1st - 5% gain
2nd - 5% gain
3rd -5% gain
4th - 0% gain

(conservative funds are designed to NOT lose money on the bad years. everyone gains money on good years - it is what happens during the down times that matters.)

you would end with $115K going at it extremely conservatively. in reality the fund i have been talking about has averaged an 11.35% return over the last 10 years AFTER sales charges.
4th - 0% gain