How to Beat The Market. Sort Of.
Posted on June 8, 2011
Filed Under Investor Mistakes, Mutual Funds, Personal Investing, The Economic Scene
Some of our peers in the financial industry have found a way to advertise that they “beat the market” without actually doing so.
On 6/4/11, Wall Street Journal columnist Jason Zweig wrote an eye-opening piece about this topic. Basically, he explained how some investment advisors make their track record look good by comparing their results to the Standard & Poor’s 500 Index, but they conveniently show the S&P without dividends. That tactic makes their performance seem better.
Here’s why. The S&P Index is made up of 500 large-company stocks, and the Index tracks the movement of the price of the stocks. During the year, many of those companies pay out dividends, so if you own that stock, you get money (or more shares), and that money should count as part of your “return.”
The daily numbers shown on TV or in newspapers reflect only the changes in the prices of the stocks. It takes extra time and effort to include the effect of dividends on the index. The information is out there, but some apparently choose to ignore it.
To be sure, that marketing “oversight” makes a substantial difference. Zweig points out that the gap between the Index with and without dividends, over the past decade, is more than two percentage points a year, on average. And when you look at returns over a decade or longer, that 2 percent compounds into a much larger number.
We have seen this type of advertising before, but this WSJ column was the first we’ve seen that actually names names of firms that have resorted to this practice. Some of the firms plead ignorance, which I find hard to believe. If you are in the investment game, you know the difference between an index with and without dividends included.
Even a firm associated with CNBC’s high-energy, highly visible host, Jim Cramer, played this smelly game. They sent out an email, using Cramer’s name, and the subject line read, “My portfolio is CRUSHING the S&P 500.” Yes, but that was only true because Mr. Cramer’s portfolio included all dividends while dividends were excluded for the S&P. An apples to oranges comparison indeed.
Fidelity mutual funds, as with all mutual funds, by law must report their performance against a reasonable benchmark (usually, it’s the S&P 500) with dividends reinvested. But as Zweig shows us, not all investment pros feel they need to work under that same ethical burden.
So once again, it’s buyer beware.
http://online.wsj.com/article/SB10001424052702304563104576363892725584866.html?KEYWORDS=jason+zweig
Related posts