The financial media offers some of the cleverest advertisements. The problem is the majority of investment products promoted are not available on your company 401(k) retirement plan menu.
What good is a Morningstar 5 Star Rated mutual fund if you can’t own it in your company 401(k) account?
How can the Fidelity “green line” help you when your company 401(k) retirement plan provider is Charles Schwab?
The worst offender in mutual fund advertising is Backtesting. Backtesting is the analysis of how well a mutual fund would have done in the past. Backtesting assesses the investment performance of a mutual fund using historical data.
Backtesting hand picks mutual fund investment performance from a specific time period in the past. The better the investment performance, the more time someone took to put together the backtested investment performance numbers.
If a mutual fund backtesting example outperforms a popular stock market index, you can bet the mutual fund company will build a television or online advertisement campaign around the numbers.
Backtesting any mutual fund is irrelevant. Any mutual fund marketing program can find a time period when that fund “outperformed” any stock market benchmark in the past.
I am divorced. I can’t back test my marriage; or I would not be divorced. Even my ex-wife would agree that at times, I was probably a good husband. How does that fact help me during my previous marriage? How does that information help me now? Or help me in the future?
If a mutual fund promotes a backtested investment performance example, the performance should be disregarded. You most likely can’t buy that same mutual fund on your existing company 401(k) retirement plan menu.
Your company 401(k) sponsor (your company) and your company 401(k) provider (Fidelity, Schwab, Vanguard, etc.) chose your default 401(k) mutual fund options. The most logical and useful investment analysis and ranking of those mutual funds should come from an independent, third-party, fiduciary level investment advisor.
You don’t need backtested investment performance. You need access to real-time investment performance rankings of all the default mutual fund options on your company 401(k) retirement plan menu.
Your company 401(k) mutual funds should be ranked by investment performance first. Ideally, ranked by annual expenses and fees second.
Ric Lager
Lager & Company, Inc.
