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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.
Fund X underperformed the SP 500 by five percentage points per year during the past five years, after beating the index by just as much in the three previous years. Fund X _______.
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Probably owns something other than large-company stocks. In this case, the SP 500 is probably a bad benchmark for this fund. It likely owns something other than large-company stocks. To put its performance into better context, check its record relative to its Morningstar category peers.
3.
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.
4.
Your personal benchmark in investing refers to _______.
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The yearly return you will need to meet your goal. This figure is what you will aim to match every year you invest for your goal.
5.
Once you've calculated your personal benchmark for investing, choose a fund that _______.
Choose wisely. There is only one correct answer.
Usually returns about the same as the benchmark. It's tempting to pick a fund that returns more than you need, but remember: the greater the return, the greater the potential for loss. Be sure the fund you pick has a history of returning as much as your benchmark, or you may not meet your goal.