“Your Fired” – Donald Trump

Breaking up is hard to do, especially when you are breaking up with the most popular person in school:  American Funds Growth Fund Of America.  This mutual fund is found in most 401(k) plans and it is one of the largest, most popular funds out there.

Here is the problem:  The fund is described as a Large Company U.S. Stock Fund in most 401(k) plans, but if you look under the hood, you see it currently has roughly 16% (and is allowed to have up to 25%) of it’s assets invested overseas in non-US companies.

Is it fair to tell plan participants the Growth Fund of America is a US stock fund?  Is it fair to compare the Growth Funds performance to the S&P 500 Index which has 0.08% of it’s assets invested in foreign stocks?  Does the Growth Fund take the same amount of risk as the S&P 500 Index?

My answer to all of the above questions is NO.  Inexperienced investors (and advisers) often choose funds based on past performance.  Good past performance is only the starting point – you need to understand what drove that performance.  Ask yourself how the fund is invested compared to the index you measure it against.  Is that U.S. stock fund really invested like a global fund?  Is that bond fund up to their eyeballs in mortgage debt?  Is that mid cap fund overloaded with technology stocks?

Good performance by itself is not good enough.