How many times have you heard “The market will recover, don’t panic, keep your money invested!” I confidently say it myself, BUT this statement may not be true for you!
While history shows that the broad index of companies that you can invest in have always recovered their value and provided a healthy return over time, individual mutual funds have not always recovered. In 2002 after the tech bubble burst and the market recovered there were thousands of mutual funds that were no longer around.
What happened to them?!? For many, the mutual fund companies quietly rolled these funds into other more successful funds and erased their awful track record! This is called Survivorship Bias. The dismal performance of the disappearing fund that you owned will not be included in the historical performance record of the fund that acquired it.
“Survivorship Bias. Fund companies statistics refer only to funds that currently exist. So when a fund has been performing poorly for several years, the mutual fund company simply terminates the fund or merges it with another. Either way, the offending fund’s statistics are wiped away, as though the fund never existed. This misleads investors into believing that the company’s overall performance is better than it really is.
Worse: When a fund terminates, it triggers tax liabilities you didn’t want and forces you to find another investment. And when a fund is merged into another, you find yourself owning shares in a fund you might not want. In all of this, you have no advance warning and no say; the termination or merger will occur whether you like it or not.”
–Ric Edelman: “The Continuing Evolution of Investment Management” 2007
This is legal but wrong. Track record investing not only does not work, the track record itself may be unreliable.
Stop letting active money managers play games with your hard earned savings! Learn how you can eliminate survivorship bias in your funds. Register for one of our Web Seminars this week or sign up and attend the next “Separating Myths” seminar at the Cornerstone Conference Center in Okemos on October 9 or at the Prince Conference Center in Grand Rapids on October 14. Register by clicking the “Workshops” Tab to the right.