The stock market finished the first quarter of 2011 on a strong note. The Dow rose 10.8% in the March period, its best first-quarter performance since 1999. The Federal Reserve is still trying to keep interest rates low and liquidity high. However, Federal Reserve officials are publicly debating the merits of continuing their quantitative easing program. Meanwhile, this easy money policy has helped the U.S. stock market climb higher.

European stocks did not perform as well during the same three-month period, since there has not been a resolution to the debt problems in Greece, Ireland, Spain, and Portugal. Nevertheless, the MSCI EAFE Index reported a total return of 2.7% in the first quarter. While still positive, this is less than half the gain posted by the S&P 500, which advanced 5.9%.

If the stock market remains a leading economic indicator, it is telling us that the U.S. economy should continue to grow. Note that the market’s recent ups and downs give further credence to the strategy of dollar-cost averaging, since no one can expect to pick the perfect point in time to commit new funds.

Although the gains were strong, less than half of the equity funds listed in the nearby table met or exceeded the performance of their respective benchmarks (S&P 500, Russell 3000, MSCI EAFE, and MSCI WORLD) in the first quarter. 

One excellent six-month performer is the Vanguard Total Stock Market Index Fund (VTSMX). For the six-months ended March 31, 2011, it reported a total return of 18.7%, outpacing most other funds on the table below by at least one percentage point during the same timeframe. This fund also reported a noteworthy performance in the first quarter. It holds the largest market-capitalization stocks traded on the New York Stock Exchange and the NASDAQ. The fund employs a passive management strategy. During the past three, six, and nine months, this strategy provided fund shareholders with very good returns. It currently has an average Overall Rank and an average Risk Rank, making it a good choice for a variety of investors.

Another fund with a noteworthy performance is the American Funds Fundamental Investors Fund (ANCFX). For the six months ended March 31, 2011, it reported a total return of 17.5%, outpacing many of the 15 funds on our list. This fund seeks growth of capital and income by primarily investing in the common stocks of undervalued and overlooked securities. It currently has an average Overall Rank and Risk Rank.

A third fund that outperformed most of its peers over the past three and six month periods ended March 31, 2011 is the Dodge & Cox Stock Fund (DODGX).  This fund invests mostly in a diversified portfolio of common stocks that appear to be undervalued at present, but have a favorable outlook for long-term growth. As of March 31, 2011, the fund had about 80% of its assets in domestic large-cap common stocks and most of the balance in non-U.S. shares. Its top-10 holdings account for almost 33% of its total portfolio. It currently has a lower-than-average Overall Rank and an above-average Risk Rank. Consequently, subscribers may want to wait before making commitments, though historical performance has proven the fund to be a suitable choice for investors who are seeking above-average performance in exchange for elevated volatility.