February 15, 2011

An Old Stockbroker / Financial Advisor Trick

Ok, the goal of any stockbroker or financial advisor is to get your money under their control and take a percentage off the top for 'managing' it.

An old trick that stockbrokers consistently use is to do that is to show you their own returns or mutual funds returns that 'outperform' the averages over a certain period, maybe last year, last three years, etc.

It looks great on paper, wow, this mutual fund has beat the index over the last three years so you need to buy it now (and oh, btw, I need some more commission).  They will always show you exactly what makes that investment look the best and no more.

The problem is that to beat an ETF or fund that tracks an index, a mutual fund will have to take on more risk or have wild swings because no one or mutual fund can beat an index more than a few years in row.  All you need to convince yourself of this is compare using a yahoo chart.  Compare American Funds Growth Fund of America (agthx) and VTI which is an vanguard etf that mirrors the S&P 500.  No surprise, VTI wins consistently and this is no slap in the face to the good folks at American Funds or the financial advisor that is trying to sell it to you.  Its just impossible to beat the house and the house is the index itself!

Remember that indexes outperform people who try to outperform them consistently, around 90% of the time, largely because of fees.  The reason it isn't 100% is because every year, you will have some who are fortunate enough, lucky enough to pick correctly, remember, the monkey who beat the S&P500 a few years ago BUT by the time you hear about it, its too late and the next few years are pretty much guaranteed to regress back to the averages and you have spent more money and time chasing returns :(

So don't fall for it, its a trick but you already figured that out :)

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