In investing you’re always trying to “beat the averages.” Whatever that means to you; whether your measure of the averages is the Dow Jones, S&P; 500, NASDAQ composite, AMEX, or any other, you need to know who you’re up against. One of the less oft quoted (but still mentioned) averages on the financial news channels is undoubtedly the Lipper Average. But what is the Lipper Average? How does the Lipper Average reflect your investment choices? Should you even follow the Lipper Average? Let’s take a look.
The Lipper Analytical Services puts out the Lipper Average. The Lipper Average is the average performance of different mutual funds in a particular grouping. People often fall prey to advertising like “beat more than half their peers in Lipper rankings.” However that can be misleading depending on what category ranking the mutual fund is talking about and how big a pool we’re talking about. If there are several thousand mutual funds in a grouping and the fund you’re looking at scored in the 55th percentile, you might want to consider a different mutual fund. Because what this means is that there were practically just as many funds that did as bad or worse than this fund then better. That means that there are thousands of better performing mutual funds out there.
Lipper Averages are also calculated on a one, three, and five year chart so you should take that into consideration when looking to the Lipper Averages to determine your mutual funds strength or weakness. If you are looking at probably most mutual funds performance from 2008, it will probably look a lot worse than 10 years prior. Because 2008 was a crazy year. So even the well performing mutual funds from 2008 still did pretty poorly. That’s not a reflection of the funds per se, just a reflection of the overall weakness in the markets.
While 2009 did have something of recovery we need to remember the 2009 also had the dreaded of March lows when the stock market hit its all-time lows in the currently still exiting recession. Not everyone was so quick to recover. For that reason and because of the explosive recovery from March through the end of the year, going on this most recent year’s average is not a very accurate telling either. You should probably look out a little bit further and see how your fund is trending over a long period of time to get a better idea about what you are looking at.
It’s important to know all the facts before you actually invest and put any of your own capital to work. To that end knowing your mutual funds Lipper Average; what it is currently, what it has been historically, and how to interpret this data; is an important component to being a smart investor. Do your due diligence, bring up any anomalies as you see them to your mutual fund’s customer service department, and don’t be afraid to turn and walk away if you don’t like the answers you get. Lipper Averages are a key tool in cutting through the clutter of the mutual fund world.
Source:
http://www.lipperweb.com/
