The Power of Myth is all well & good in the realms of literature, theater, cinema, and even comic books. Alas, in the more tangled world of markets and finance, a myth can be so deeply cherished that most people mistake it as fact: The "Katrina made oil prices rise" myth became real in the collective mind, and a mountain of evidence to the contrary has not overcome the delusion.
There are other examples. Take the "benefits of diversification" myth, for example, which has given birth to the four-trillion-dollar stock mutual industry -- a big reality by anyone's yardstick. Here are a few points of fact to consider; you tell me if this adds up to "diversification" (quotes & chart from The Wall Street Journal).
"From 1950 to 1965, equity mutual funds turned over their portfolios at an average rate of 17% per year; in 1990-2005, the turnover rate averaged 91% per year."
"As shown in the chart nearby, direct ownership of stocks by American households has declined from 91% in 1950 to just 32% today. The 9% ownership stake held by financial institutions in 1950 crossed the 50% mark in 1983, and now totals 68% of all stocks."
"The excessive advisory fees, expenses, hefty sales loads, and huge commissions on portfolio transactions paid to brokers in return for their sales support consumed something like 45% of the real returns earned on fund portfolios during the past two decades."
"Institutional investing is now largely the business of giants. America's 100 largest money managers alone now hold 58% of all stocks."
Now, don't even think about telling me that I fail to understand "diversification," and how it helps reduce risk. From 1983 to 2003, the S&P 500 averaged a 13% annual gain; the average stock mutual fund investor earned 3.5% annually over the same period. In the real world, the only thing diversification has managed to "reduce" are investor returns.
The truth is this: An ever-larger number of people give their money to an ever-smaller number of managers, who in turn oversee the taking of an ever-bigger slice of the pie.
Facts don't usually persuade the collective mind, but it can be otherwise for individuals who think for themselves. See the evidence we see, and you'll have no trouble distinguishing myths from reality. Click here for more.
Have you moved beyond the myth of mutual funds?
Our Financial Forecast Service offers the kind of information that allows you to think for yourself, rather than relying on a mutual fund manager. Learn more about EWI's Financial Forecast Service.