| ll Huff wrote a short and very informative book, | | | | excessive costs, the financial research literature |
| "How to Lie with Statistics," which was first | | | | tells us that historical mutual fund performance is |
| published in 1954 and was amusingly illustrated by | | | | meaningless. The industry knows that many |
| Irving Geis. This book is still in print and remains | | | | investors naively project past fund performance |
| very popular on Amazon. It plainly and humorously | | | | into the future. Yet the scientific finance literature |
| discusses how statistics can be distorted and | | | | simply does not support such assumptions. |
| misused to serve the self-interest of the | | | | If investing were this easy, then those who buy |
| presenter. | | | | ETFs and mutual funds based on past |
| Historical ETF and mutual fund investment | | | | performance would be consistent winners in the |
| performance charts are a case in point. While the | | | | future and would grow relatively richer and richer. |
| numbers they present might be historically | | | | The opposite turns out to be true. |
| accurate, their presentation in advertising, on line, | | | | For your amusement when you are being sold to |
| and in printed materials can amount to lies from | | | | by a securities industry sales person, ask to see |
| several perspectives. | | | | an asset-weighted chart that combines the entire |
| ETF and mutual fund performance charts are | | | | historical performance of all the funds for a |
| designed to lure gullible individual investors with an | | | | mutual fund family. Good luck in getting to see |
| implied promise that superior past performance | | | | that one! I could list a dozen reasons why you will |
| will continue. The financial research literature tells | | | | be told that such a fund family chart does not |
| us clearly that on average this is a promise that | | | | exist. However, the real reason is that this |
| cannot be kept. In other words, historical fund | | | | aggregate historical performance chart would likely |
| performance charts are a veiled lie. They may | | | | show that the entire fund family trails a very |
| report factual information, but their purpose is to | | | | broad market index by almost as much as the |
| deceive. | | | | fund family charges in fees. |
| Selecting Only "Winners" to Promote | | | | I use the word "almost," because professionally |
| When selling to you, securities industry sales | | | | managed mutual funds have shown a slightly |
| people and the fund companies that advertise | | | | positive ability to pick individual securities. |
| performance select only those historical | | | | Unfortunately, this slightly positive gross returns |
| investment fund performance charts that show | | | | advantage is far more than wiped out by mutual |
| superior historical performance. The industry sells | | | | fund management fees and transactions costs, |
| its ETF and mutual fund winners, and it ignores or | | | | which are several times greater than this small |
| hides its losers. | | | | gross returns gain. |
| Charts for their loser funds are available, but ETF | | | | Then, of course, there are the mutual fund sales |
| and mutual fund sales representatives are not | | | | loads and 12b-1 marketing fees and the |
| eager to present them. You have to dig them out | | | | percent-of-assets management fees that you |
| yourself on the web. Or, these inferior or average | | | | pay to your broker or investment advisor. In |
| performance charts will be mailed to you AFTER | | | | return, your broker and investment advisor will do |
| you have bought what you thought was a | | | | you a dis-service by only pushing selected funds |
| "superior" fund, but, gosh, things just did not | | | | with "superior" performance charts and higher |
| remain superior. | | | | costs. These sales and asset management fees |
| Except for very, very poor historical | | | | just drag your returns down even more year |
| performance, which tends to be an indicator of | | | | after year after year. |