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Funds 202: Benchmarks for Funds

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1.
Which is the best index to use when analyzing a U.S. large-company fund's performance?
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The SP 500 Index. The DJIA is too narrow a benchmark for most large-company funds, and the MSCI EAFE index follows international stocks.
2.
Imagine that you have calculated that you need a mutual fund that returns 7% per year for the next 35 years to fund your retirement. What would be a reason NOT to instead choose a fund that returned 8, 9, or even 10% so that you could save extra?
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There would be a greater risk of loss. The return is greater because the risk is greater. You would be risking your ability to retire in 35 years if you chose the fund with the higher annual return.
3.
Which is the best index with which to compare a small-company fund's performance?
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The Russell 2000 Index. The SP 500 includes mostly large-company stocks, and the Bloomberg US Aggregate Bond Index follows bonds. Neither is an appropriate benchmark for small-company funds.
4.
Why is the Dow Jones Industrial Average rarely used as a performance benchmark for stock mutual funds?
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Its range is very small. With only 30 stocks, it's hardly indicative of the whole stock market.
5.
In the world of mutual funds, peer groups are funds that buy the same types of securities that your fund buys.
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True. Their value is that they give you a way to examine your fund's performance.