Product distributors stand to make huge amounts of money if they can convince individual investors like us to buy their product. The senior staff’s bonuses and the value of their share options depend upon persuading you to buy their product. Clever use of fund performance statistics is one of their most persuasive tools.
Product distributors will shamelessly ignore all their actively managed funds that have underperformed the market and will spend huge amounts of money advertising the small number of funds that have performed well.
The industry has been attempting to convince clients to buy on the back of fund performance for as long as we have been in the industry.
Consider this example:
A fund that loses 5% a year for four years and makes 50% in year five has average fund performance of about 4% a year.
But a fund advertised as showing returns of 4% per annum over the last five years is far more attractive than a fund that has lost money in four out of the last five years.
This example might appear silly and we might reassure ourselves that we would not fall for something so obviously contrived but it is an easy trap to fall into. We advise you and advise ourselves to be cautious of all statistics and very cautious of all statistics in marketing: establish the source; check using two or three authoritative sources.
Product distributors’ aims are, like the product manufacturers’ aims, completely at odds with your aims. Product distributors will try and persuade you to purchase the products that make them the most money.
Awaken your inner cynic when it comes to financial statistics: invest with your eyes wide open