| or, let's assume for a moment that historical ETF | | | | performance and the market index benchmark is |
| and mutual fund performance charts actually do | | | | what counts. |
| have some useful information for individual | | | | A consistently superior ETF or mutual fund would |
| investors. This might not actually be very funny | | | | have a cumulative performance line that |
| to many fund investors who have been lured into | | | | increasingly and consistently diverges from the |
| lousy and expensive investments because of | | | | benchmark index. Visually, the wedge between |
| historical performance charts. | | | | the two lines should just keep widening. On the |
| It can be hard to see humor, when the securities | | | | other hand, a widening wedge could also describe |
| industry siphons away your assets through high | | | | the situation of an overly easy market index |
| management fees using the siren song of superior | | | | benchmark comparison and mediocre ETF or |
| historical performance charts. The cover-your-rear | | | | mutual fund performance. |
| small legal print in the footnote of the | | | | Rarely do you see historical ETF or mutual fund |
| performance chart is actually right. Essentially, it | | | | performance graphs with increasingly widening |
| says, "Don't count on it." And, you should not. | | | | lines -- particularly since luck is a major factor and |
| Interpreting rates of change from a cumulative | | | | high investment management fees and high |
| performance chart is a challenge for many people. | | | | trading costs tend to drag fund performance |
| Visually, cumulative historical ETF and mutual fund | | | | down relative to appropriate market index |
| performance charts are just very difficult to | | | | benchmarks. If, for example, the lines diverged |
| interpret. Most people would only look at the most | | | | quickly ten years ago and then they maintained a |
| recent values to see whether the fund's | | | | relatively constant gap thereafter, that could |
| cumulative performance to date is above or | | | | mean that a very small and immature fund got |
| below the index. | | | | lucky and/or it had a riskier investment portfolio |
| Well, of course, if you are being sold to or | | | | profile. |
| advertised to, then the most recent cumulative | | | | Then, money from performance chasing individual |
| performance will always be above the market | | | | investors flowed in, and the fund got much larger. |
| index benchmark, because of selectivity. | | | | If the gap between the lines on the chart does |
| Selectivity means that fund companies select only | | | | not increasingly widen, then this means that |
| their "winners" to promote. This is the easiest kind | | | | subsequent performance has just been mediocre. |
| of fund to sell to naive individual investors -- you | | | | If the lines tend to narrow that demonstrates |
| know, "good" funds with "better" performance. | | | | subsequent inferior performance. Cumulative |
| However, an ETF or mutual fund's performance | | | | performance could still be above the index due to |
| history that would truly exhibit investment | | | | a selectivity bias and/or an easy index |
| management skill (or just a sting of good luck) is | | | | benchmark, but the fund might really have been |
| the relative rate of change in fund versus index | | | | exhibiting mediocre or inferior performance for |
| benchmark asset valuation. The rate of change | | | | years. |
| between the investment fund's historical | | | | |