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Too Easy Mutual Fund And ETF Performance Index Benchmarking

Darrell Huff wrote a short and very informative book, "How to Lie with Statistics," which was first published in 1954 and was amusingly illustrated by Irving Geis. This book is still in print and remains very popular on Amazon. It plainly and humorously discusses how statistics can be distorted and misused to serve the self-interest of the presenter.


Using Easy Index Benchmarking to Advertise "Superior" Performance


Historical investment performance charts will compare a particular fund's performance against some market index benchmark. A market index is a market index, isn't it? The question that individual investors should ask is whether the market index benchmark really is appropriate. All index benchmarks are not the same, and there can be very significant differences between market index benchmarks -- even when indexes seem to match the particular investment style of the ETF or mutual fund in question.


When you look at a performance chart, do you investigate whether the fund company picked a challenging index or an easy hurdle that they could more easily stumble over? For more about the variations between index benchmarks, see Craig L. Israelsen's article, "Variance Among Indexes: Don't judge an index by its title" in the May/June 2007 issue of the Journal of Indexes (Pages 26 to 29) Dr. Israelsen analyzes the various indexes published by the six major U.S. index providers (Standard & Poors, Frank Russell, MSCI, Morningstar, Lipper, and Dow Jones). He finds very wide performance variations even with market indexes that supposedly represent the same "style" of investing.


Dr. Israelsen concluded his article by commenting: "It is important to recognize that significant performance differentials among prominent indexes can lead to misleading conclusions about mutual fund performance. Funds with mediocre performance histories can be made to look better by being compared to a prominent benchmark with a weaker performance history. At the very least, the industry needs to recognize the existence of potentially sizable performance differentials among various U.S. equity indexes, and therefore view performance comparisons between Mutual Fund A and Index B for what they are: marketing materials."


Historical ETF and mutual fund investment performance charts present numbers that are historically accurate. However, their presentation in advertising, on line, and in printed materials can amount to lies from several perspectives. ETF and mutual fund performance charts are designed to lure gullible individual investors with an implied promise that superior past performance will continue. The financial research literature tells us clearly that on average this is a promise that cannot be kept. In other words, historical fund performance charts are a veiled lie. They may report factual information, but their purpose is to deceive.


Larry Russell is the Editor and Publisher of The Skilled Investor website and The Skilled Investor's Financial Planning Blog.


Financial ideas bombard you. Some are right, but many are wrong and can be bad for you. With objective, scientific information, I help you to tell the difference and to make better decisions.


Source: www.articlesbase.com