|
Mutual Fund Performance And Why There Are No Dice Counters In Vegas!
By: Dr. Scott Brown, Ph.D.
A way that investors get ripped off and in a sense rip themselves off is based
on the culture of performance in the mutual fund industry. If you stop and think
about it there is absolutely no reason that the past has to equal the future. If
you have not been particularly successful as a stock investor in the past, for
instance, there is no reason that you won’t be unsuccessful in the future. One
reason I hope that you are reading this article is that you want to improve as
an investor.
Let’s discuss how professional gamblers profit in Las Vegas. Card counters are a
type of professional gambler that uses their memory of what card cards have been
dealt out of a deck in a game of blackjack (also called 21). Since there are
only a certain number of each type of card they can increase their bets when it
is more likely that they will win then lose. This works because after the
shuffle the deck starts with a certain composition and a number of games are
played until the next shuffle. Toward the end of the deck you can know what may
be coming out if you are paying attention because each hand in the deck is
depends on what has been dealt before.
There are no professional gamblers who count the numbers rolled on a pair of
dice on the craps tables. This is because there are only two dice and each roll
is different. In other words, each roll of the dice is independent of any other
roll. Since each roll is different it doesn’t matter what was rolled in the
past. The same thing would happen if the deck in a game of blackjack were
shuffled each time between hands. This is a lot like the stock market where we
don’t know what the general level will be from time to time because of random
information entering the market in the sort term. Mutual fund managers try to
outsmart the market in the short term instead of patiently waiting in the long
term where it is more likely to correctly determine if stocks are high or low.
So why then does the public pay so much attention to the nonsensical advertising
of mutual funds that brag about prior performance in past years? Mutual funds
buy expensive ads in newspapers, magazines, and on television where they tout
their performance over the past one, three, five, and ten years. The mutual fund
industry irresponsibly promotes this “culture of performance,” even though it
knows perfectly well that it misleads investors.
Studies have shown that if you take the top 10% highest yielding funds in any
year, four out of five of them will not be in the top 10% a year later! For this
reason I strongly recommend that if you can only buy mutual funds, as in the
case of the 401(k), then restrict your purchases to indexed funds like the
Vanguard 500 (VFINX).
About the Author:
Dr. Scott Brown, Ph.D., the Wallet Doctor, is a successful investor. Dr. Brown
holds a Ph.D. in finance. The Wallet Doctor is sought after for investment
advice and coaching. For more information visit Dr. Brown’s site at http://www.BonanzaBase.com
or sign up for his investment tips at http://www.WalletDoctor.com
|
