Don’t Fall For Highs And Lows

If a mutual fund you own had a disappointing year in 1997, don’t be overly upset. If it had an outstanding year in 1997, don’t be overly elated.

That’s the advice you will get from analysts toiling in a new field, called “behavioral finance,” which explores the way investors think and the mistakes they commonly make.

Even if you don’t subscribe completely to these advisers’ theories and conclusions, what they have to say may help clear away the confusion that can cloud anybody’s thinking.

Unless you invested for precisely the 12-month period from the end of 1996 to the end of 1997, the yearly return posted by any fund you owned matters less to you than you might think.

A fund’s annual return, after all, measures its results over an entirely arbitrary period. Investment trends don’t adhere to any calendar schedule. Do you check your funds’ performance for all the other 12-month measuring periods you could impose - like for instance Feb. 3 of last year to Feb. 3 of this year, or July 15 to July 15?

“Most investors have investment horizons of five years or more,” said Helen Frame Peters, chief investment officer at Colonial Management Associates in Boston, which runs Colonial funds.

“Therefore, focusing on performance for 1997 by itself is not rational,” Peters observed in a recent bulletin to Colonial investors. “If there is a major market pullback in U.S. stocks in 1998, how important is 1997 performance?”

So what are we saying here - that all annual fund statistics are useless? No, not at all. They serve as a handy convention for measuring one fund’s performance against another and funds singly or collectively against any one of numerous market indexes.

Checking annual data is certainly a reasonable way to get an idea of how things are going at any fund you are interested in.

But “improper benchmarking” starts to creep into your thinking if you say, “Hey, the Quixote Fund had a great year in ‘97. I think I’ll buy some more,” or “This is ridiculous. My small-cap fund got clobbered by the S&P 500 again!”

When you look at things this way, the spotlight is focused on the funds and the markets, not on what you are trying to achieve, in what time period and with what degree of risk.