According to Yale's legendary investment guru, David Swensen, the mutual-fund industry’s reputation deserves serious shredding:
“…Ill-advised buying and selling of funds costs the investing public a substantial sum. In 2010, Morningstar found that if mutual fund investors in 2000, as a whole, had simply bought and held their funds for 10 years, their investment outcomes would have improved by an average of 1.6 percentage points per year. That 1.6 percent may not sound like much, but it adds up to tens of billions of dollars per year. Another Morningstar study, in 2005, examined 10 years of returns for 17 categories of stock funds. In each category, the actual returns — after taking into account the ill-timed buying and selling — fell short of the returns that were advertised to the public. More stable funds performed better; more volatile funds performed worse.
"Highly volatile technology funds, for example, generated annual returns that were a stunning 13.4 percent below the reported results, as a direct result of monumentally mistimed buying and selling. Holders of less volatile conservative allocation funds suffered only a 0.3 percent annual deficit.
"Even while the investing public suffers from exposure to funds with volatile performance, the mutual fund industry benefits. With a volatile set of offerings, the fund companies will always have some (temporarily) strong performers that rise to the top and earn the four or five stars needed for marketing to a gullible public. Of course, the volatility cuts both ways, ensuring that erstwhile top performers fall to the bottom and end up with one star or two stars. From a business perspective, however, all is not lost, as a number of one-star and two-star funds, with sufficiently volatile strategies, will rise phoenix-like from the ashes and join the exalted ranks of four- and five-star funds…."
Find out the rest at http://www.nytimes.com/2011/08/14/opinion/sunday/the-mutual-fund-merry-go-round.html?_r=2&src=recg&pagewanted=all
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