“On the twelfth day of Christmas my broker gave to me…12 killed off mutual funds…”

“Each and every year hundreds of mutual funds are being killed off!” A statement like this sounds like a TV special asking you to send money in to help the possible extinction of something. In the year 2009 there were a total of 26,905 mutual funds in existence, of which 2,307 funds were killed off just in that year. This could mean that the fund just ceased to exist; the fund could have been absorbed into another fund; or even that the fund changed its name to give it a different persona! Needless to say active managers that attempt to predict market movements and pick stocks are not doing what they are supposed to be doing, and their analysis, charts, or crystal balls have not worked for quite some time. It is amazing to think that since 1923 there have been a total of 43,668 mutual funds that have been created and if there were only 26,905 left at the end of 2009 that means that a total of 16,763 mutual funds have died!

Incredible isn’t it? My question is if you were to look at the average returns of mutual funds right now, would they include the returns of those dead funds? NO! That is what we call Survivorship Bias;

“…the results of returns to skew higher because only successful mutual funds which were successful enough to survive until the end of the period are included.”

Be careful of those companies that have a “proprietary” way of looking at the market. They could be the next Helios Select Fund that was born on 3/22/1999 and died 5/29/2009 with a total return of -91.9%! Be prudent in your search for investments. We do not advocate looking at the track record of a mutual fund manager, but advocate investing in passively managed mutual funds that have a strategy based on Nobel Prize-winning economists. The combination of asset allocation, diversification, and the ability to know and control the risk in your portfolio are key elements when creating a life-long game plan. If you do not know what these concepts are or why they should be important to you, please give us a call. We would be happy to take an hour or so to chat about these and many other important financial issues in your life.

Philip A. Guske