3 Reasons Why Your Fund Drops When The Market Rises

Have your mutual funds ever declined in value on a day when the market went up? How can that happen? Does it mean you’ve got stinky funds that need to be dumped? Well….you may indeed have odorous investments but the daily performance isn’t necessarily a good indicator of it.

It’s important to understand your funds’ performance and how it can legitimately diverge from that of the overall market. Why? Because if you don’t you might make a silly investment move you’ll regret later. The truth is there are three basic reasons why your investment performance may not jive with the overall market direction in any on particular day.

1. Today vs. Yesterday

If you follow the market during the day you already know that its performance is updated every few seconds. But mutual fund prices are only updated once a day and that’s done several hours after the market closes. Why? Because fund operators have to calculate the NAV which is a lot of work. They must add up the value of all the fund holdings, subtract fund expenses and then divide up the net value by the number of shares outstanding. That takes time friend – even in the world of super computers and big time math nerds.

Example. Let’s say its 11 A.M. PST and you check out the market action. You’re delighted to see that the S&P 500 is up 10 points. But when you look at the price action for your fund, you see that it’s down $1.25 per share and you reach for the sell button. Relax and slow down.

That $1.25 loss is what happened to your fund on the previous trading day. It has nothing to do with the value of your fund at this moment in time. You don’t know how your fund is doing today because the performance hasn’t been calculated or reported yet. Cool your jets and have a glass of orange juice. Life is still good and your mutual funds might be just fine.

Do you have questions about your investments?  connect with me..  I’ll do my best to help.

2. Dividends

As I said, a fund’s listed price is a function of its NAV. And when funds declare dividends, the NAV drops and so could the fund’s share price. If that happens, you might think that it lost value but it ain’t necessarily so.

Your NAV does drop when the fund declares a dividend but if you reinvest your dividends you will own more shares. If you don’t reinvest, you’ll collect the dividend and have more cash in your hands. The net effect of a dividend declaration is nil on your total value but you will see a decline in the share price. So what. It doesn’t mean anything.

Take away? When you see you fund’s per share price drop like a bowling ball on one particular day, find out if the fund declared and/or paid out a dividend before you freak out and do the “Watusi”.

3. Ziggy Zaggy

If you own an actively managed fund as opposed to an index fund your fund’s performance will absolutely differ from the market. That’s because the fund holdings are different from the index. And by the way, different indexes perform differently too for the very same reason. The S&P might go up on a day that the NASDAQ declines. This happens frequently.

So on any one specific day your fund might zig while the market zags. But this should even out. There should also be times when your market climbs when the market drops.

Look for longer term patterns. If over a week or more your fund slides while the overall market rises you may want to rethink holding on to it. It could be a fund that’s managed very differently and therefore exposes you to way too much risk.

Mutual fund performance is important but the daily moves don’t mean all that much. If you see some crazy price action in your fund, find out why before you jump to any conclusions.

Have you ever been perplexed by what happened to your mutual fund on one particular day? What ultimately was behind it?