Fund's 115,000% Total Return Shows Power of Long-Term Compounding

Mutual funds with good records have produced long-term returns that may seem unbelievable—for instance, one fund has a more than 115,000% total return over 64 years.

The secret is harnessing the power of compounding over many years. And it’s something ordinary investors can achieve.

Here’s a striking example: American Mutual Fund, a growth and income fund, produced a 115,442.80% total return from its inception in 1950 to Dec. 31, 2013 (Class A shares). The annual average return was 11.68%. If you put $100 into it at the start, you could have $114,542.80 today .

Invest in a fund that’s shown good results, has low expenses and high manager ownership, and keep it for the long term.

Some other American Funds have also turned in enormous long-term returns. For instance, AMCAP Fund, a growth fund, has produced 16,048.89% total return since inception in 1987 through Dec. 31, 2013. The annual average return was slightly lower, 11.51%, but the main reason in the difference in total returns is that American Mutual Fund had a 37-year head start.

There are some key lessons.

Invest for the long term. While the power of compounding starts in any year in which you have a gain, it gains more power the longer you hold an investment.

Don’t try to time the market. The oldest investment truism is still widely ignored. American Mutual Fund produced a huge long-term return despite many bear markets. They include the 1961-1962 bear market (28% loss in in S&P 500), the 1968-1970 bear (down 36.1%), 1973-1974 (48.0% loss), 1980-1982 (down 27.8%), 1987 (-33.5%), 2000-2002 (-49.1%) and October 2007-2009 (-56.4%).

Buy well-managed funds with low expense ratios. Even the most talented portfolio managers will struggle to produce top-notch results if they’re fighting the drag of excessive expenses. American Mutual Fund’s expense ratio is currently 0.59%, for instance, and AMCAP Fund has a 0.70% expense ratio.

Look for funds whose portfolio managers put a lot of their own money in them. They’re less likely to take unnecessary risks for short-term gains.

Frank Congemi is an investment advisor in Deerfield Beach, FL. More background on him can be found at www.frankcongemi.com. He can be reached at 800-228-2309 or [email protected].