Funds of all types again powered higher in the third quarter, as stocks and bonds around the world rose in unison. Not only did investors get strong returns from their funds, they also got them with few headaches along the way.
Consider the largest mutual fund by assets, Vanguard's Total Stock Market Index fund, which sits at the heart of many 401(k) and other accounts. It returned 4 percent for the quarter, as of Sept. 27. It's the eighth straight quarter where the fund has made money.
The usual trade-off that investors accept for the chance to make big money in stocks is the possibility of big drops along the way. But only twice during the quarter did investors have to stomach a day where the fund lost more than 1 percent. Compare that with two years ago, when investors had to deal with a dozen such days in the third quarter.
Roughly 95 percent of mutual funds tracked by Morningstar had positive returns for the three months through Sept. 27. Even categories of funds that struggled earlier in the year, such as energy stock funds, did well from July through September.
Just don't assume utopia will continue. After their phenomenal run in recent years, stock and bond funds will likely offer more modest returns in the future, analysts said. Stock prices are higher than usual, relative to corporate profits, which makes them look more expensive. Bond funds, meanwhile, face the challenge of an expected rise in interest rates, which would cause their prices to fall.
Of course, many analysts were saying the same thing at the start of this year and even a year before that, only to see funds continue to do well.
In the third quarter, bond funds were resilient. The largest bond fund by assets, Vanguard's Total Bond Market Index fund, returned 0.6 percent for the quarter through Wednesday. That's more modest than in prior quarters, but it's much better than the 3.2 percent loss it recorded in last year's fourth quarter. Funds that invested in riskier bonds did even better during the quarter.
Stock funds were strong again, and smaller-stock funds closed the gap. Businesses are making bigger profits again, and a parade of better-than-expected earnings reports from companies during the quarter lifted stock funds.
