Is it good to invest in mutual fund during the down time in market?
Say there is a mutual fund and its annual return in the past 3 years i.e. 2017, 2018, 2019 were -10%, +20%, and -10% respectively.
A and B invest 0 in this fund at different time points. A invests in 2017 and B begins investing in 2018. The return at the end of each year was:
2017
A invested 0 so return is (=100*0.9)
B invested [CO] so return is [CO]
2018
Return for A is 90*1.2 = 8
Return for B is 100*1.2 = 0
2019
Return for A is 108*0.9 = .20
Return for B is 120*0.9 = 8
Thus at the end of 2019 A has a return of .20 and B has a return of 8. Though A was invested for 3 years, he lost money while B made money.
Now my doubt is, it was A's investment during the down time in 2017 that enabled the fund to provide a 20% return in 2018. How can A be at a loss and B gets all the gains? Did I miss something in my calculations?
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Your calculations are correct. Keeping it simple...
On the surface, one might think that because A made 20% in one year and lost 10% in two years that he should be at break even because -10% +20% -10% equals zero. Unfortunately, that's not how it works. A's nominal gains and losses were -.00 + .00 - .80 for a total loss of .80
B's winning year was twice as much in percent as his losing year so he should obviously do better than A. His nominal gains and losses were + and - for a total gain of
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