How funds companies will sell you a lemon and tell you its lemonade

I'd heard of the concept of survivorship bias before, but I've been living the dream for myself this week.

When mutual funds companies boast about their cumulative returns over the years, its often a little bit misleading, critics say, because the money-losing funds they churned out over the years get killed off or blended into new products, so their gaudy failure rates don't get factored into the numbers. In a nutshell, that's what's known as survivorship bias.

To give an extreme example, if you buy a mutual fund that loses 90% of its value in the first year, that's going to be one ugly black mark on that company's performance ratio for years to come. They'd need several years worth of double-digit returns in subsequent years just to get back to break-even.

But, if they take that fund and roll it into a new product after that ugly first year, then all of a sudden they can pretend the one horrific year never happened, and instead trumpet the steady gains they've made for you on the new product. The black mark disappears, replaced by a shiny, new money-making product for you. Ignoring the fact, of course, that at the end of the day, you haven't actually made any money. It's just been sliced and diced around between several products, distracting you from the key issue.

That's exactly what happened to my lone mutual fund this week. That ugly -86% return since inception? Never happened, apparently. But boy, doesn't that 5% return on my shiny new fund sound impressive? Look at all that black ink! And look, the fund's chart actually points up!

Warrants mentioning.

New job

I'll spare you all the customary self-flagellation for being a bad little blogger of late. I've recently had an unexpected job change, and as you can imagine there's a lot of change that goes along with that.

I've got a bunch of ideals percolating around, so stick around.

I promise a more fruitful October around here.

Great minds think alike

It's rare that I find myself agreeing with Canada's major banks on very much, but I was certainly nodding my head more than usual as I read the story in this morning's Globe on what the heads of Canada's major banks think about the current market turmoil.

In a nutshell? Yes, the August swoon isn't pleasant for anyone, but it is probably necessary to shake out some of the bad bets people were making. When money is easy, there isn't adequate pricing of risk. Markets can't go up forever, and the current bull run will emerge stronger because of it.

But we're not out of the woods yet. "People haven't gone to confession yet," TD Bank head Ed Clark was quoted as saying. "Your gut is telling you there's a lot of stuff to come out in the marketplace." In other words, we haven't seen the worst yet because a lot of these credit problems haven't seen the light of day in quarterly reports yet. That's going to happen over the next 3-6 months.

Add it all up and I come to the conclusion that the market's going sideways for awhile. Fundamentals will inch it up, but every time some new company fesses up to bad debts, it'll sink down again. So I'm in no immediate rush to get money into the market any time soon, but I'm still very positive on the mid- to long-term outlook. I have not a shadow of doubt that the Canadian banks will by and large remain the profit-making machines they always have been, so if they keep stagnating for much longer, I might be tempted to scramble together some more money to put into them.

Pay yourself first -- or you won't

You've heard before about how one of the easiest things to do to change your finances for the better is set up an automatic savings program. It doesn't matter if it's as little as 10%, the point is by automatically deducting money from your paycheque as soon as it comes in, you won't have time to spend it, and you learn to live on the balance.

I've had an ASP going for about as long as I've had this blog, and it's developed into a nice tidy sum by now. But a few weeks ago, I cancelled it since I was going to be having larger-than-usual expenses (what with moving and going on vacation and all)

Just as it's amazing how fast your savings will grow by virtue of an ASP, so have I learned how quickly they will flatline when you don't. My expensive time is coming to an end so I'll be setting up another one, but it's really surprising to see how my savings pile has done nothing over the last little while -- even while I have some excess cash lying around in my checking account.

It's a cliche, but it works. Pay yourself first.

Even Ron Popeil knows you're better

off when you set it and forget it...

I was the second gunman on the grassy knoll, too

OK, my man-crush on Warren Buffett may have gotten me in trouble this time.

Mr. Buffett, please allow me to apologize for my actions. You're always telling people to try to convince you why you should buy their companies, and I have this really great business pitch for why you should buy my blog.

The guard spooked me and I panicked. Sorry. My most sincere apologies for scaring your wife, too.

(Note to anyone lacking a sense of humour: I'm kidding.)

Housing Reaganomics

There are many different ways of gauging economic health. The stock market. Job numbers.


One of the more interesting ones (to the star-struck voyeur in me, anyway) is to keep tabs on what the wealthy are up to. I'm not sure they're as clairvoyant as, say, the consumer price index is when it comes to how much cash we all tend to have in our pockets at the end of the day, but there's a gaggle of signs around that suggesting that the well-off are spending like there's no tomorrow -- worldwide credit crunch be damned.


Celebrities don't appear to be feeling the pinch. Whether its private jets or gaudy, $50,000 handbags, celebrities are still splashing money around like its going out of style. Sales of racing horses are skyrocketing, both in volume and individual prices. If oil-rich Saudi chiefs are throwing down so feverishly on their money-losing hobby, the good times will surely trickle down to the rest of us, the theory goes. And lately, prices for the ponies have been heading up in a hurry.


Closer to home, the super-rich are seemingly just as confident. REMAX put out a report this week saying that sales of luxury homes are booming. Canada's real estate market has hot and cold pockets across the country, but sales of luxury homes (the definition of what constitututes luxury changes from region to region) have already shattered last year's numbers, and its only September.


So good news all around, then. Your boss's retirement is definitely within reach. Try to remember that when you check how your stock portfolio's done over the last little while.