What Your Broker Doesn"t Want You To Know About Your Mutual Funds!
Many investors get sucked in by the hype that some mutual fund companies propagate.
Even though the regulators require most mutual fund advertising and brochures to include the infamous phrase, "Past performance is no guarantee of future results" guess what most people tend to base their fund picks on? After all its hard to ignore when fund companies repeatedly brag about their most recent successes.
But what is the problem with using past performance as an indicator? After all if someone has been doing a great job of managing money who's to say he won't continue? This is exactly what your broker wants you to believe.
He wants you to think that there is some level of predictability to performance, but is there? Consider this, in order to judge how well a fund is doing it is often compared to a corresponding index such as the S&P 500.
(The S&P 500 index, simply put, is 500 companies that are tracked to help give us a gauge on how large companies stocks are doing) What your broker might tell you is that about 15% of actively managed stock mutual funds beat their respective indices every year.
So you would naturally think that's great, I want one of those funds managed by a guy who beat the index.
Unfortunately what your broker is afraid you'll find out is that the 15% who beat the index last year are not necessarily the same 15% who will beat it this year.
So while there may be a couple of index beating funds every year the chance that those funds will remain among that 15% for an extended period is astronomically low.
This inconsistency is what makes it so hard to select a good fund.
Last years biggest winner may well be this year's biggest dog.
Consider this, according to Jason Zweig of Money Magazine almost 40% of 614 aggressive growth funds crashed between 1962 & 1995, "if you had chosen your funds from among each years stars, you would have bought lots of funds that expired.
"But this is not just a phenomenon of aggressive funds.
As of the 1st quarter of 1999, there were over 3,000 stock mutual funds for investors to choose from.
Out of those 3000+ funds only 414 had a performance history of 15 years or longer, and only 17 (or 4%) of the 414 stock funds that had a 15 year performance history beat the market S&P 500 Index by 1%.
And that was during one of the best times in history for the stock market and mutual funds.
So if past performance is really no indication of a great fund than how can you choose where to invest your money? One way to avoid all of the hype is instead of trying to beat the S&P and losing in the process why not just buy the S&P or better yet an S&P index fund.
Not only will your results be more predictable but your fee's will be much lower.
After all does it really make sense to pay someone to beat the market, if the odds are he won't? And how much better off would you be if you don't have to pay for that advice?
Even though the regulators require most mutual fund advertising and brochures to include the infamous phrase, "Past performance is no guarantee of future results" guess what most people tend to base their fund picks on? After all its hard to ignore when fund companies repeatedly brag about their most recent successes.
But what is the problem with using past performance as an indicator? After all if someone has been doing a great job of managing money who's to say he won't continue? This is exactly what your broker wants you to believe.
He wants you to think that there is some level of predictability to performance, but is there? Consider this, in order to judge how well a fund is doing it is often compared to a corresponding index such as the S&P 500.
(The S&P 500 index, simply put, is 500 companies that are tracked to help give us a gauge on how large companies stocks are doing) What your broker might tell you is that about 15% of actively managed stock mutual funds beat their respective indices every year.
So you would naturally think that's great, I want one of those funds managed by a guy who beat the index.
Unfortunately what your broker is afraid you'll find out is that the 15% who beat the index last year are not necessarily the same 15% who will beat it this year.
So while there may be a couple of index beating funds every year the chance that those funds will remain among that 15% for an extended period is astronomically low.
This inconsistency is what makes it so hard to select a good fund.
Last years biggest winner may well be this year's biggest dog.
Consider this, according to Jason Zweig of Money Magazine almost 40% of 614 aggressive growth funds crashed between 1962 & 1995, "if you had chosen your funds from among each years stars, you would have bought lots of funds that expired.
"But this is not just a phenomenon of aggressive funds.
As of the 1st quarter of 1999, there were over 3,000 stock mutual funds for investors to choose from.
Out of those 3000+ funds only 414 had a performance history of 15 years or longer, and only 17 (or 4%) of the 414 stock funds that had a 15 year performance history beat the market S&P 500 Index by 1%.
And that was during one of the best times in history for the stock market and mutual funds.
So if past performance is really no indication of a great fund than how can you choose where to invest your money? One way to avoid all of the hype is instead of trying to beat the S&P and losing in the process why not just buy the S&P or better yet an S&P index fund.
Not only will your results be more predictable but your fee's will be much lower.
After all does it really make sense to pay someone to beat the market, if the odds are he won't? And how much better off would you be if you don't have to pay for that advice?
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