|
||
Smart Investor Makeover: Picking Hot Mutual Funds and Other Fables (Video)
Every day brokerage firms across the country recommend mutual funds to their clients.
Sometimes they make these recommendations based on Morningstar's much hyped "star" ratings. They may also rely on the past performance of the fund or the fund manager.
It's all an elaborate con.
One study showed that 5-star Morningstar rated funds actually underperformed the mutual fund averages in ensuing years.
The media reinforces the ability of "experts" to pick superior funds. Forbes has an annual "Honor Roll' of mutual funds which it touts as being helpful to investors. Vanguard founder, John Bogle, examined the "Honor Roll" picks from 1974 to 1990. He found that "Honor Roll" funds significantly underperformed the markets during the period after their selection. The cumulative returns of the "Honor Roll" funds was 439.7% vs, 633.4% for index fund investors.
In this week's video, which is entitled "No Stars," I discuss the data you need to know to make informed decisions about mutual funds.
If I had thought more about the title, I would have called it "No Conscience."
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
We need to stop the corruption by Goldman, bank of Amerika, and Jp Morgan. Stop the Geithner and bernanke. .
Obama's policies may not be working as well as many had hoped:
1st 100 days - There are 2.9 million more people unemployed in May than there were unemployed in January. The unemployment rate went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million jobs. The biggest losers were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost
good political & economic articles: http://iamned.blogspot.com
Mr. Solin,
I used to love your columns, but I am not able to watch your videos. Is the text with the video a full transcript? If so, please note it as such, if not, please include a link to the transcript. I don't want to miss what you are saying because of technical issues. Thanks.
Dan - I'm curious about your claim that 95% of actively managed funds underperform their corresponding benchmark index. I have now seen several other claims that studies show this number is closer to 50% (I have also seen it reported at 66% that underperform).
Are there just a number of different studies showing different results. And it all depends upon where you select your starting and stopping points?
See Dan Solin's Profile
There are many different studies which measure different time periods. The one that puts it all in perspective was done by John Bogle. It can be found here:
http://www.vanguard.com/bogle_site/sp20040413.html.
Take back the trillions of $$$ given to the banks, who just sit on it and make it totally ineffective then start government incentive to create realistic industries that give employment and generate real productive income, some of which would hopefully be from exports.
Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.
hat tip to: http://investmintideas.blogspot.com for the good articles
Dan:
how do you think Morningstar comes up with their star rating?
they don't just look at the gross returns. they do what you were saying is important in your last post; they look at risk adjusted returns, using standard deviation as an important measure of risk
their star rating is basically useless, by why is it useless, the past returns are real, then what is the variable that is faulty?
it is the risk adjusted returns, because standard deviation is just as useless as the star rating, trying to measure risk in domain of stocks is like measuring average depth of an incoming and outgoing tide
it is always changing, we dont know what the risk is
math is great, but it has been misused in world of finance, and until this changes public is going to be misinformed
past returns are useless to predict future returns, past levels of risk useles to predict future levels
investing is domain where most information is just noise and predictions are worthless
See Dan Solin's Profile
Morningstar ratings are inherently misleading because they rate actively managed funds. Actively managed funds have higher expense ratios than index funds. This is the primary reason why they underperform index funds. Why should investors care about the relative past performance records of actively managed funds when there is another category of funds that is demonstrably superior?
You are correct that annualized standard deviation of historical returns is not predictive of future volatility. While there are limitations on its use, it remains of critical importance as a tool for investors to understand the historical risk of the portfolios they are holding. As such, I must disagree with your conclusion that the measurement of standard deviation is "worthless." For a helpful summary of standard deviation and its importance to investors, see:
http://www.ifa.com/EmailCampaign/web_articles/StandardDeviationSimplified_e1.html.
William Bernstein, who is one of the great financial minds in this country (and the author of numerous excellent financial books), does a nice job explaining standard deviation on his web page:
http://www.efficientfrontier.com/BOOK/chapter1.htm.
I am in particular agreement with this observation by him: "If your broker is not familiar with the concept of the standard deviation of returns, get a new one."
Of course, I don't understand why investors use brokers in the first place!
Dan:
I read against the gods 2 or 3 times
he is a good writer
modern portfolio theory is just that a theory
I hope you and the theory are correct ( I think you are not)
Dan: , it remains of critical importance as a tool for investors to understand the historical risk of the portfolios they are holding. As such, I must disagree with your conclusion that the measurement of standard deviation
what value is there in knowing the previous risk?
is it predictive of future?
or does it lead to more risk/complancy?
I dont know
See Dan Solin's Profile
I suspect what you have "been through the last couple years" has not included determining the right asset allocation for your investment objectives and tolerance for risk, and investing in a globally diversified portfolio of low cost stock and bond index funds.
Full disclosure about me can be found at my web site: smartestinvestmentbook.com.
Great advise. Although the mystic of investing can appear quite complicated, a little common sense goes a long way. Thanks for all that you do.
I have bitched and moaned in the past when the advice has seemed to me to be wishy-washy. This time it is crisp and clear. I have never questioned the reliability of Solin, only his super caution in offering canards. Not so here.
I have depended on Morningstar in the past, and their rating system seemed broadbased. So I am surprised that a survey showed the results described here. I now like the comparison between managed funds and index funds and the results that favor the latter. Of course, nothing here is guaranteed, but some advice is better than others.
The stock market tends to be (and this is a generalization, so take it with due caution) cyclical. Investment managers tend to have strategies and expertise that helps them in particular cycles.
I would expect that fund managers who earned 5 stars one year would underperform their peers the next few years, much less index funds that have much lower expenses...
You must be logged in to comment. Log in or connect with
