"Money File"-Mutual Fund Math
Friday, November 17, 2006SUSIE GHARIB: In the "money file" tonight, when what you see isn't always what you get. Here's Eric Schurenberg, managing editor of "Money" magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Here's a little exercise in fuzzy math -- the fuzzy math of mutual fund returns. Over the past 10 years, Janus Enterprise, a fund popular during the market bubble, returned an average of 6.8 percent a year. Funny thing is, when you figure out the return shareholders in the fund got, you arrive at a very different answer -- very different, minus 11.5 percent. The fund had a positive return, but shareholders lost money at a rapid clip.
How could this happen? Because of the investors' own self-defeating behavior. Look, when you see something like a fund's 10-year annual return of 6.8 percent, you're seeing a highly hypothetical reality. It tells you how fast your money would have grown if you'd invested it 10 years ago in this fund and held on through all its ups and downs. But real people don't do that. We put money in and take it out all the time and unfortunately, we have the bad habit of putting the most in when the fund is up and taking the most out when it's down.
This is called buying high and selling low, and when you do it, you make less than if you'd put all the money in at once and just held it. Buying high and selling low is how the shareholders of Janus Enterprise could end up losing money over 10 years when the fund had a positive record. Conclusion: don't try to time the market. If you do, you'll lose. Don't chase hot performers. If you do, the return you see published everywhere won't be the return you really got. I'm Eric Schurenberg
