Investors Who Look Back See Rosy Prospects

It is a common practice for investors to look back and see how a fund was doing in the past, before they decide to buy its shares. But since the gloomy days of the bear marker are behind us, many investors have nothing but good things to see, The Wall Street Journal reports.

According to Morningstar, over the past three years, U.S. stock funds have gained an average of 17.79% a year. In comparison, the three-year track record ended three months earlier, the average was 9.33%, and for the three-year track record ended three months prior to that, it was 4.08%.

Daniel Wiener, editor of the Independent Adviser for Vanguard, said that looking at one time period can be misleading, so comparing a few time periods is a more accurate system. This way a buyer can get a good idea of what a fund's ups and downs have been, and not just its high points.

The Securities and Exchange Commission's regulation about advertising returns to the public requires a fund to include a bar chart of its latest quarter returns for the trailing one, five and 10 years to give investors a better ability to judge a fund's risk factors.

For instance, when looking at theVanguard 500 Index Fund , it was up 16.56% for the three years ended through September. But for other time periods, the performance is quite varied; its respective one-, five- and 10-year performance was 12.13%, negative 1.60%, and 9.41%.

Vanguard always suggests "people approach performance numbers with a healthy dose of skepticism," said Catherine Gordon, a principal of investment counseling at Vanguard. Robert Plaze, an associate director of the SEC's division of investment management says that by looking at performance reports, investors tend to end up investing at the wrong time in the investing cycle when the stock prices are near the peak, after along period pf gain.

But showing a share's performance over a long period of time is not enough. Tim Schlindwein, an investment adviser in Chicago, says that a performance must be measured against a benchmark or a relevant market index. Though funds are already required to make comparisons, many experts, like Mercer Bullard of Fund Democracy, argue that too many companies, Vanguard included, use the S&P 500 or another broad measure as a benchmark. Bullard argues that a narrower benchmark is needed to make an accurate comparison.