How to lie with statistics
The Skilled Investor makes a very important point about how mutual funds and investment advisors manipulate data to demonstrate superior performance. But Vanguard is one group who refuses to play the game:
“The way(s) you mitigate against it are several. One, you never — in our view — never promote performance. You just never run a performance ad. I think that is endemic to our business, and I think it’s a shame for our industry. When you read a performance ad, there is an assumption that the strong performance will continue. And that is not necessarily true. The second thing is … when you call Vanguard to talk about our funds, or when you read our literature, you won’t find a Morningstar Star Rating. … The third way to mitigate is with communication. When you read our annual reports after a terrific year, you can be sure that we will tell investors, “please don’t assume that this will continue.” … Finally, you also have to be willing and able to close a fund and have a cooling off period. That’s bad for business, and it always inspires some nasty letters. But it’s how you build a performance track record. I have never once regretted closing a fund. At the end of the day, firms that promote performance do so at their own peril.”
However, the truth of the matter is that these funds that hype performance are just giving people what they want. What is really needed is financial literacy.
