Originally Posted by David1961
I have a question about the total return of mutual funds. I know this might seem like a very basic question, but it is a little confusing to me.
Suppose I had put $10,000 into a no-load mutual fund on Jan 1, 2007. Also assume I did not add to that investment or withdraw any money from it. Also, I had all the distributions (dividends and capital gains) reinvested back into the fund. Now, to make the math easy, suppose the fund had a total return for 2007 of exactly 10%. Does that mean that the market value of my initial investment on Dec 31 would be $11,000? (10% more than $10,000). It has always been my impression that my value would be $11,000. If not, what other factors are at play that determines the value of my investment?
YES, in your example you would have $11,000.
In the real world the following creates different rates of returns:
1) person deposits money into account
2) person withdraws money from fund (for rebalancing or other)
and these two forces are going independantly of:
3) the mutual fund does not increase 10% jan 2, then stay flat
4) it also does not increase .1% each day or each week. It goes up .5%, then down .75%, then up .5%, then up .5%... each day/week/month
5) The price variations of the fund (the point of items 3 and 4) combined with 1 and 2 change performance.
Example- Most of my funds were in 3-5% returns for 2007. My IRR was 7%. I actually did better than my funds. This is because
a) I sold off some in June as part of a rebalance
b) my Roth contributions are Jan-August. No new money is put in in Sept-Dec to a portion of my portfolio.
c) My wife's 401k kicked butt (10% IRR)- she holds some company stock whichs adds some risk and volatility.
d) obviosuly the dates of 401k purchases (1st and 15th of months) did OK.
e) Portfolio is 98% equity-2% bonds as of Jan 1.