Investment & Financial Articles
Title: Lies, Damn Lies and Mutual Fund Returns
Author: Ulli G. Niemann
Article:
How many times has this happened to you? You're at a social
function and the conversation turns to investing. Pretty soon,
people are comparing how well their investments are doing. As
you might imagine, being an investment advisor this happens to
me a lot. However, I recently had an experience with it that
startled me.
Bob, one of the guys I was chatting with at a party, asked what
kind of returns I had made for my clients with my methodical no
load mutual fund strategy during the past year. I replied that
they had unrealized gains of slightly over 29%, after management
fees, for the 8 months that we were invested.
Bob countered with a smirk that he had made a 40% return. I
raised my eyebrows and told him that was darn good-and suggested
that maybe he ought to be managing my money. At that point we
were interrupted and, as the evening went on, I began to wonder
exactly how Bob had gotten his great return.
I cornered him a little later on and, upon digging a little
deeper, the story looked somewhat different. Yes, he had made a
40% return on a mutual fund he had some money invested in,
however, we were comparing apples and bananas.
He had a total portfolio of $100k. Being cautious, he had
invested only $10k into a mutual fund, from which he profited
$4k after he sold it. The balance of his portfolio ($90k) was
sitting in a money market fund earning some 0.35% per year.
So, while he had made 40% on 10% of his investment, he had only
made 4.35% on his whole portfolio. My methodology was also
focused on protecting my clients' investments and it had
increased their entire portfolio 29% (unrealized). That would be
an apple to apple comparison when measuring my returns against
his. Bob's one fund realized 40% return. However, had I
approached it the same way Bob had, I could have described one
of the funds I used that had realized over 49% for the same
period.
Actually, Bob's not-so-good-news story didn't stop there. Bob
admitted to having followed the losing Buy and Hope strategy
through the bear market of 2000 and had finally sold out at a
50% loss a year ago, before committing $10k to a mutual fund
investment.
I was pleased to be able to tell him that my methodology had
gotten my clients out of the market before the bear took his big
bite, and they suffered only minimal losses before finding
safety in money markets accounts. And when my trend tracking
figures directed us to move back into the market, they still had
most of their money poised to start earning for them again-which
it did and very nicely, thank you.
The moral of the story is to look past the surface and don't
take any numbers thrown at you at face value. Remember, most
people returning from a weekend in Las Vegas will shout about
their winnings and mumble about their losses.
About the author:
Ulli Niemann is an investment advisor and has been writing about
objective, methodical approaches to investing for over 10 years.
He eluded the bear market of 2000 and has helped countless
people make better investment decisions. To find out more about
his approach and his FREE Newsletter, please visit:
www.successful-investment.com.
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