Mr. Random Fool want to show you that a bunch of investments his being following has performed remarkably well over a span of years (that he chose). He then wants you to invest in his chosen recommendations.
Let us assume that Mr. Fool is showing you historical data from 1990 to 1999. He sells you his story and sells you stocks or mutual funds. Why should you worry when he has data to prove it?
But here is the catch. If you want to play Miss. Smart then one way is to zip out other start and end dates (for the same investments) that are not chosen by Mr. Fool. Why should 1990 and 1999 be the only start and end dates? How about 1983, 1981, or even 1954 for start dates, and 2005, 2006 or 1970 for end dates. If the DOW would not give the result that you are looking for you may even pick the S&P 500 or other index. The point that I am making here is that any stock or mutual fund, different start/end dates can give you different results. So, if you are selling, you’ll try to pick a stock or fund that has recently done well. A salesperson wants to show a positive picture, she or he will sell the wares.
Another catch is to compare a stock or fund proposal with a relevant market index. For example, if someone is selling you (or you are picking) a large cap fund or stock, you may want to compare it with the S&P 500 index. Benchmarking with a relevant index is a good test of performance.
But let me tell you something. It has been shown that a blindfolded chimpanzee throwing darts at the Wall Street Journal has a 50% chance of beating the market in a given year. Yet, investors think that a finance manager who beats the market in any given year is a “genius,” without knowing that their investment manager might as well be a chimp. Everybody wants to beat the market.
Everybody believes they are the next Peter Lynch or Warren Buffet, that they have that special something, a one-oneupmanship over the market. The illusion exists even when the market defeats them. Just one more try and I might make it says the illusionist. But the they must face up to the truth, otherwise they run the risk of losing it all. You can see lately how the DOW screamed past 14,000 only to fall down to a bit over 13,000.
Also, many experts approach you to manage your money. If they push you with upfront loads then they are taking you for a nice long ride and are cheats in some respects. An unbridled market place can put sufficient pressure on an individual to lead him or her to such rationalizations of seeking assistance. Therefore, the individual needs help.
You'll fall off an unbridled horse, at the same time, the horse must be trained and you should test the horse out before going for a long bridled ride. Remember, the horse can topple you into a ditch as well.
For many more postings on personal finance in this blog, please review the Personal Finance Index in 2Merrill.
Disclaimer: References to Personal Finance are strictly for "educational purposes" and does not hint or offer any specific financial advice. For financial advice, please seek the advice of a professional if you feel unable to handle your own finances..
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