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