April 24, 2014

What is survivorship bias in regards to managed mutual funds? Why should you care?

2 thoughts on “April 24, 2014”

  1. Garrett Haag says:

    In some mutual funds there are some that do so badly that they excentually die with no tomb stone, you know they extisted but you have no information about them to add in to the averages and the data people present for the return on mutual funds. Since people dont count to worse accounts the average return on managed mutual funds is much lower then they actually tell you. Such as in 2008 there may have been some managed mutual funds that help a large amount of private REITS that went under and were swept under the rug. You should care because this is one more example of how managed mutual funds are trying to put a flees over your eyes and seem better then they actually are.

  2. Mike Finley says:

    Well said, Garrett. Let’s review.

    Survivorship bias shows us how the surviving managed mutual funds (mutual funds run by people who buy and sell as they attempt to pick the winners and time the market) have done over time. This is all well and good, but what about the mutual funds that died a slow and poor performing death? Unlike real life, the mutual fund industry acts like they never existed! No tombstone, no records, no nothing. They did not exist. They did not survive. Why should you care?

    When comparing managed mutual funds against index mutual funds (securities match an index with no extra buying and selling and that means no timing the market or picking the winners), managed mutual funds fail to beat those benchmark indexes.

    The reason is fees more times than not, but poor performance plays a part as well. The chance of picking a managed mutual fund to beat an index can easily be as low as 2 out of 10. Those odds stink AND that does not include those dead mutual funds.

    Survivorship bias only includes the best mutual funds, not the dead ones. If we included them in the research. the odds could very easily be closer to 1 in 10. Why would anyone play those odds? The answer is you shouldn’t play a game that is stacked heavily against you.

    When investing your hard earned money over long periods of time, select broadly diversified no-load index funds (in your company retirement plan and at Vanguard.com) and hold onto those funds through thick and thin (bull and bear markets). They will survive. YOU will survive!

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