What is the Average Return on Investment of Mutual Funds?

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Wall Street financial advisors will often say that a good return on investment should be around 10 percent, but they will also mention that reaching this goal requires adequate management and a solid strategy. Based on this advice, it makes sense that mutual funds, which are managed by seasoned investment professionals, have historic annual average returns higher than 10 percent.

One of the various objectives fund managers seek to accomplish is to attain annual returns that are at least on par with performance of certain benchmarks such as the S&P 500, the Dow Jones Industrial Average, the Nasdaq, and others that make up Wall Street as whole. Based on these benchmarks, which managers at many mutual funds track as their main investment strategy, the average annual return on Wall Street has been about 12.5 percent in nearly a century.

Quite a few mutual funds generate returns that are better than the market; even those funds that yield a little less than 10 percent will get a positive nod from Wall Street analysts who are accustomed to seeing catastrophic trading losses. Just because the market has performed better than 10 percent over many decades does not mean that it has not suffered through certain periods.

When looking at the rise of tech stocks during the 1990s, Wall Street returned nearly 20 percent, and mutual funds that invested in global tech and science firms posted returns higher than 50 percent, at least until the market became overvalued to the point of crashing. Shortly after the Dot-Com Bubble burst, the terrorist attacks of September 11, 2001 brought about a period of negative returns for the S&P 500.

Not all mutual funds posted negative returns for the period between 2000 and 2008; the losers were mostly funds tied to the performance of the S&P 500 and other market benchmarks. Index funds became very popular thanks to advances in financial technology and by the rise of the Nasdaq in the 1990s, but they disappointed in the first decade of the 21st century. During this period, however, mutual funds that focused on banking, real estate, mortgage, and financial sectors had very solid annual returns, only to come crashing down with the housing market bubble, the global financial crisis and the Great Recession.

In 2013, Wall Street strongly embraced the recovery of the American economy by posting a return of 32.43 percent. The election of U.S. President Donald Trump and the promise of tax cuts for major corporations made investors very happy with the Nasdaq surging nearly 30 percent and the S&P 500 posting a 21.83 percent return in 2017.

Interestingly, mutual funds focused on U.S. stocks did not outperform Wall Street in 2017, and this suggests that managers are being cautious based on reports from analysts who believe that a market correction is forthcoming. Mutual funds that invest in foreign stocks and emerging markets rocketed to 29 percent annual returns in 2017, and funds focused on tech stocks rose by more than 47 percent.