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Sound Financial Group - Bothell, Washington


SFB036 Illusions of Investing Part 2 - When Track Records Don't Matter

| October 04, 2016
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Episode Summary

This week, Paul dives into another investing illusion. Be sure to check out last week's episode on stock picking and what your typical mutual fund won't tell you. On this episode, Paul discusses why you can not trust the track record of a mutual fund, asking what does your mutual fund have in common with someone flipping a coin? They both have pretty much the same odds. Watch out for this illusion!

What Was Covered

  • 00:35 - Be sure to check out Investing Illusions Part 1 before listening to this podcast podcast.
  • 01:25 - Illusion number 2 is about track record investing and why it doesn't matter.
  • 01:40 - Last week Paul talked about stock picking.
  • 03:20 - It's close to impossible for an asset manager to successfully and consistently pick stocks.
  • 03:55 - If Paul took a basket of about 3,000 mutual funds and analyzed them from 2007-2009, what would he find?
  • 04:30 - Of the 38% mutual funds that outperformed the S&P 500, how many of them won consistently over a 4 year period?
  • 05:10 - Let's look at the numbers from a longer period of time. From 2005-2009, what would we find?
  • 05:45 - Only a quarter of those 38% mutual funds were able to successfully perform over those 4-5 years.
  • 06:30 - The reality is and the numbers clearly show, mutual funds have no idea what they're doing.
  • 07:15 - This is why you should not pick a mutual fund based off track record.
  • 07:25 - The numbers get worse if it's a bond-based mutual fund.
  • 07:30 - Paul discusses an interesting exercise he does, at the Sound Financial Group live events, where everyone flips a quarter.
  • 10:10 - Remember, there's a reason why on every mutual fund legal document it says, "Past performances no guarantee of future results."
  • 10:35 - There will always be somebody who does really well, but that's still based off of chance.
  • 11:10 - You can't guess whether a mutual fund will make you money or not. There's simply no real way to tell.
  • 11:35 - Stay tuned to next week's podcast about market timing.


"It's impossible for an asset manager to successfully and consistently pick stocks that will outperform the market."

"38% of mutual funds, a little better than 1/3 of them, actually outperformed the S&P 500."

"Past performances no guarantee of future results."

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