Buy, Sell, or Hold? What Our Research on Performance Shows

We have assembled large amounts of research data on mutual fund performance. This data should prove useful in yielding insights on questions of crucial importance regarding how we manage our own portfolio of fund investments; once understood, we hope to be able to convey these insights to our readers as well.

In particular, we are trying to determine whether we can ascertain a straightforward set of rules to help investors make good buy, hold, and sell decisions based on our data which covers performance results going back to early 1995. Prior to then, it becomes somewhat difficult to find all the relevant data.

We have already presented some of our initial findings in our July ’08 newsletter. (Click here to read the article and for information on how we set out to define a classification system which could be regularly applied to each of the major fund categories to determine whether that category was currently a BUY, SELL, or HOLD.)

We now can present data that seems to clearly show the merits of using this classification system in helping to make each of these 3 crucial portfolio decisions. In particular, we can now document that using such a system would have resulted in improved overall portfolio results as compared to less systematic approaches, or merely just buying and holding. The results were particularly dramatic over the last 8 1/2 years.

Results

First we show performance outcomes for stock fund categories classified as BUY, SELL, or HOLD for the period between Jan. 2000 and July 2007. The ensuing performance for funds so categorized was examined through the close of June, 2008. (In our July newsletter, our data presented a less exact analysis of the Jan. 2000 through July 2005 period.)

The table, and the two that follow, shows what the average return would have been for many of the major fund categories (such as Large Growth, Small Blend, International, etc.) that we classified using the rating system we developed; the figures thus show what the typical return would have been 1, 3, and 5 years later, assuming one had bought, sold, or held a fund in that category at the time the signal was first generated. (The 3 and 5 year returns are annualized, that is, they are average per year returns.)

The returns shown for funds categorized as SELL are the returns the investor would have received had he/she continued to own the fund without selling. Returns highlighted in red indicate performance that we consider deficient and therefore problematic for investors.

Recent Data for Fund Categories Classified as BUY, SELL, or HOLD