Part of making intelligent mutual fund selections is having a realistic perspective on the potential return a fund could provide. For example, if you're investing for the long term and want your portfolio to increase in value, you may want to concentrate on funds whose investment objective is long-term growth rather than current income.
Evaluating the funds that meet your initial criteria means using a two-step process: first looking at the average annual return of an appropriate benchmark for the type of fund you are considering and then at the historical performance of the fund itself — ideally over a minimum of ten years if the fund has been in existence that long.
While past performance doesn't guarantee future results, knowing what has happened in the past gives you a sense of the most you can reasonably expect to gain and a sense of what can happen in a downturn. For example, if you're considering a diversified large-company equity fund, you could get a sense of how that asset subclass as a whole has performed by looking at the annualized average return of the Standard & Poor's 500 Index and the Lipper Large-Cap Core Index. Then you could check the annualized return of the fund.
If over a number of years the fund has done at least as well as (and ideally somewhat better than) the benchmark, you might conclude it is worthy of further consideration. But if the comparison is disappointing, you might decide to look for another fund.
Marc Lackritz
Marc Lackritz discusses the benefits of a long-term investing strategy
To invest with success, you must be a long-term investor. The stock and bond markets are unpredictable on a short-term basis, but their long-term patterns of risk and return have proved durable enough to serve as the basis for a long-term strategy that leads to investment success. Although there is no guarantee that these patterns, no matter how deeply ingrained in the historical record, will prevail in the future, a study of the past, accompanied by a self-administered dose of common sense, is the intelligent investor's best recourse.
Marc Lackritz