December 26, 2008

Would you buy this mutual fund?

Lets consider the mutual fund named PGB. PGB has a lot of buzz and you'll see people on the net saying its a great investment. Lets look at PGB's price over the past year and before.

The price for PGB hit a high of $10.11 a share back in March of 2008 and then like most equities it has dropped significantly since then. PGB hit a low of $7.12 a share by late October. Since then the fund rebounded a bit and is now at $8.26. So its currently down 18% from its peak of the year.

Here's a graph of PGB prices for 2008:

You might notice that in each month there is a pretty wide difference between the high and low. So the price of PGB has pretty high volatility. In every one of the past 12 months the price of PGB has fluctuated at least 7.9% and as much as 26.8%.

If we look back further in PGB's history we see a see a big boom and bust cycle followed by a current boom. From 1975 to 1980 the price boomed and more rose over 300% going from about $1.50 to over $8.00. Then after 1980 PGB hit a bust and dropped down to around around $3 and then stayed between $3 and $5 from 1980 till 2004. Now since 2004 the price has gone up significantly and jumped up about 100% to hit its 2008 peak.

If you look at the long term trend from 1975 to today in 2008 the price of PGB has increased at an annual average rate of about 4-5%. Also the stock went through a 26 year period between 1980 and 2006 where there was 0% growth in the price.

A couple other details about PGB is that it pays no dividend or capital gains distributions. Also PGB has a load / fee to buy that varies a lot and is set by the selling agent. The purchase fee can vary anywhere up to 8% or more and is set by the seller.

So here are key points about PGB:

  • Down 18% from its 2008 peak
  • Average rate of increase of 4-5% since 1975
  • Fluctuates in value from 7-26% within each month
  • Saw 0% growth for 26 years
  • Costs 0-8% in fees to purchase

By comparison lets look at the general S&P500 :
  • Down 41% from its 2008 peak
  • Average rate of increase of 8% from 1975 to today
  • Fluctuation of 5-39% within each month for this year
  • Saw 0% growth for 1998 to 2008
  • Can be bought with 0% fees

S&P500 has had rose drop in the past year and some months have dropped a lot compared to PGB. However long term PGB has only grown 4-5% while the S&P has grown 8% annually.

Given how PGB has performed in the past and how it compares to the general S&P do you think it is a good investment?

I don't.

PGB isn't a real mutual fund. Its just an example with a fictitious name.

The numbers I used are the prices that gold has traded for. Now that you know that the numbers are all about the price of gold and the return on investment for gold, does this change your mind about whether or not you think its a good investment?

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