Investment Fund Performance Charts — Industry Cynicism About Unsophisticated Individual Investors

by

The Skilled Investor

The securities industry knows that chasing historical performance is bad for individual investors, but they encourage this behavior by publishing historical performance charts and 4 star and 5 star ratings, which are also largely meaningless. For the industry not to know would imply that many very smart professional investment managers have had their heads in the sand about decades of financial research.

The securities industry and many of its brokers and investment advisors know that low cost index strategies are better for individual investors. However, the “active-management-beat-the-market” industry crowd will not make any money off of you, if they tell you that. They have to push the “we deliver superior performance” mantra, because that is the justification for their excessively high and performance killing fees. Since market realities make it virtually impossible for actively managed funds to consistently beat the market after their fees, they have to resort to promises, deceptions, and what Darrel Huff would call “statistical” lies.** (Darrell Huff wrote a short and very informative book, “How to Lie with Statistics,” which was first published in 1954 and was amusingly illustrated by Irving Geis. This book is still in print and remains very popular on Amazon. It plainly and humorously discusses how statistics can be distorted and misused to serve the self-interest of the presenter.)These lies include: #1 selecting only winners to promote, #2 easy index benchmarking, and #3 hard to interpret cumulative historical performance charts. Those in the industry who do not understand this have not bothered to do their homework. And, why should they? If these superior performance hustlers learned what is good for individual investors, they might also realize that they should find another career that adds some genuine value to our society.How one fund family solves this problem — They refuse to play the game.In the May/June 2007 issue of the Journal of Indexes, there was a “Straight Talk” interview with John Brennan, CEO of the Vanguard Group, who succeeded John Bogle in 1996. (Pages 24-25, 50) When asked about performance chasing, Brennan said the following: “The way(s) you mitigate against it are several. One, you never — in our view — never promote performance. You just never run a performance ad. I think that is endemic to our business, and I think it’s a shame for our industry. When you read a performance ad, there is an assumption that the strong performance will continue. And that is not necessarily true. The second thing is … when you call Vanguard to talk about our funds, or when you read our literature, you won’t find a Morningstar Star Rating. … At the end of the day, firms that promote performance do so at their own peril.” (And, The Skilled Investor would add — at the peril of their clients, that is, you!)(Note that there is no business relationship between The Skilled Investor website and the Vanguard Group or the Journal of Indexes. I have not received any kind of compensation for this article whatsoever.)Larry Russell

is the Editor and Publisher of

The Skilled Investor website

and

The Skilled Investor’s Financial Planning Blog

.

With objective and scientific financial information, I help you to make better decisions.

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Investment Fund Performance Charts — Industry Cynicism About Unsophisticated Individual Investors}