Originally created 05/30/99

Stock mutual funds are a smart investment



NEW YORK -- There is a simple reason why so many people have picked stock mutual funds for the job of managing their money: The funds have an impressive resume.

We're not talking here about a flash-in-the-pan showing over the last quarter by some individual fund riding a hot streak. Things like that happen all the time without proving much.

Instead, we're looking at the record achieved by growth stock funds as a group over a truly long-term stretch -- the past 35 years.

From the start of 1964 through the end of 1998, reports the research firm of Wiesenberger in Rockville, Md., the Wiesenberger Growth Mutual Fund Index posted an average annual return of 12.97 percent, doubling investors' money every five and a half years or so.

Over that span of almost two generations, the growth fund index bested both the Standard & Poor's 500-stock composite index, which averaged a 12.21 percent annual gain, and the Dow Jones industrial average, which averaged an 11.70 percent annual gain.

Growth funds also outperformed single-family houses, Treasury bonds and bills, gold and silver, farmland, the Swiss franc and U.S. savings bonds. They trounced inflation, which averaged 4.88 percent a year.

"The average growth mutual fund outperformed all alternative investments reviewed over the past 35 years," points out David Chase in the just-published 1999 edition of Wiesenberger's Investment Performance Digest.

Of course, the mighty bull market on Wall Street had a lot to do with the growth funds' outstanding showing. Even the most ardent fan of the funds would acknowledge that 13 percent a year for 35 years is a lot to expect from any investment, and the future probably won't be so bounteous.

But the last 35 years weren't just a one-way ride on the success express. Bear markets, some of them quite severe, struck stocks in 1969-70, 1973-74, 1981-82 and 1990. Then there was the Crash of 1987, which compressed a bear market-sized decline of more than 30 percent into three months.

If you bought stock mutual funds in the 1960s, you had to ride out a very disappointing decade in the 1970s, when it looked as though chronic inflation was wrecking the stock market. Then, in the '80s and '90s, you had to resist the ever-present temptation to cash out your gains, amid constant cries that stocks had climbed to unsustainable heights.

In truth, very few people owned stock funds all through the last 35 years. In the early '60s, there was only about $20 billion invested in all types of mutual funds, compared with more than $5.5 trillion today.

Even among those investors who were aboard in the early years, many didn't stay. According to Investment Company Institute figures, the number of shareholder accounts in long-term funds shrank by more than 3 million in the lean years, from 10.33 million in 1973 to 7.17 million in 1981.

In any case, something like three-quarters, conservatively estimated, of all of today's fund accounts weren't opened until the '90s.

Skeptics on the funds, and there are still many of them, seize on these numbers to say that the funds' record is largely illusory. The spectacular gain of the past 35 years, they say, was achieved starting from a low base, with only a handful of funds owning a small piece of the stock market.

As more and more people got into the game, the funds' task got harder. If in the beginning the funds enjoyed all the speed and maneuverability of a sports car, today they more closely resemble a bus -- and a heavily loaded bus at that.

Points taken. But commentators have been describing the theoretical limitations of funds ever since the 1960s. And through the past 35 years, the average stock fund, by Wiesenberger's reckoning, has somehow contrived to outdistance the Dow, outstrip the S&P 500, and achieve an outstanding investment return.

It's a debatable question whether stock funds will beat the averages and provide a good payoff in the future. But if the issue is whether they CAN do these things, well, the record of the last three and a half decades is there to speak for itself.