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Showing posts from August, 2009

Did You Do as Well as Your Mutual Fund?

It's common practice to look at a fund's total return number for a snapshot of what performance to expect, but that won't give you the full picture. Morningstar studies have shown that investors' actual gains frequently pale in comparison to reported total return numbers. This phenomenon frequently plays out among funds that attract assets after streaks of hot performance, only to see some investors get skittish at the first signs of underperformance. After a moment's though, even a novice investor will realize that this behavior is just the opposite of the mantra -- buy low and sell high.

This practice can be more broadly attributed to bad behavior and lack of a plan or philosophy when it comes to investing. Investors are human and humans are emotional. As much as the logician in me would like to believe my left brain is working to drive my decision making, logic comes in after emotions are experienced to provide context for how we are feeling and not the other way…

Bangladesh Butter Production Predicts U.S. Stock Returns

After reading the title of this post, my hope is that a look of disbelief is cast on your face. Of course butter production in Bangladesh has nothing to do with prediction of US stock market returns. However, through data mining all sorts of 'relationships' can be demonstrated. Many mutual funds, ETFs, and trading strategies are built upon these data mining strategies--most often to the harm of investors that utilize them.

As Jason Zweig describes in a recent article in the Wall Street Journal, entitled Data Mining Isn't a Good Bet For Stock-Market Predictions, "The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone. This sham is known as data mining."

I recall in from my business statistics course in grad school, how I was able to show that ice cream consumption was correlated to the murder rate-…

Bond Investors Misled by Wall Street Journal Article

In an article published today in the Wall Street Journal, entitled "The New Bond Equation," the author attempts to educate readers about the potential risks involved in investing in bond mutual funds, given the current economic environment. He writes:

"As the financial crisis heads into its third year, investors in bond funds are facing some difficult choices. Investors usually turn to these funds for safety. But bond funds are facing a host of pressures that are driving down returns, raising long-term risk—and making it tougher to settle on the right investment strategy."
While I agree with the author's statement above, he makes some statements that mislead bond investors. (Click here to read the full article.) For example, he writes:

"....they’re buying vehicles that invest in intermediate-maturity bonds. These funds also typically hold a mix of government, mortgage and investment-grade corporate bonds, which spreads risk around. Even cautious intermediate-…