Mutual fund have gotten a bad wrap for the last few years. Their fee’s are high, they rarely beat the market, blah blah blah.
Turns out there’s another mutual fund surprise that doesn’t look too friendly. The Securities act of 1933 specifies that when advertising past performance, they must report holding period return for several periods; specifically the 1-, 5-, and 10-year average annual returns. Since these returns are blatantly displayed and used across the industry for comparison, most investors turn to them to assess the fund.
knowing that investors look to these time periods, mutual funds make an effort to capital on an investors tendency to chase the returns. Funds with ‘good’ looking HPR are likely to boost their marketing expense, and fees as they know investors will ‘buy’ in. In practice this doesn’t work out well for the investors, as most mutual funds don’t continue on the same track and the some of the bad periods ‘roll’ out of the HPR