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