Human emotions interfere with good investing. This quick, fun interactive video starts with a simple game and then illuminates how to recognize superior mutual funds.
NOTE: YouTube annotations have to be enabled for the interactive feature to work. This generally does not work on mobile devices for this reason.
Video Transcript: How To Recognize Superior Mutual Funds
This is an interactive game that helps you to see that it is not very hard to distinguish superior mutual funds from poor ones.
Level 1 – If Only You Had A Crystal Ball!
The first level of the simple Outfox-The-Box game invented by author Bill Schultheis is like choosing your investments after you know what the outcome will be. It simply establishes the obvious fact that choosing the superior mutual fund would be easy if you had a crystal ball.
Level 2 – But you don’t
No we don’t have a crystal ball, but the second level of this simple game demonstrates that choosing the best fund is still incredibly simple if you know the odds of doing better or worse.
In The Coffeehouse Investor Bill Schultheis writes,
It’s important to keep this silly little game in mind when dealing with Wall Street, because Wall Street loves to criticize the concept of indexing as a boring approach to investing in which you forego all opportunity to beat the stock market. What Wall Street is really saying is, “Ignore the $8,000 box and give us your money and we will gladly choose another box for you, because we are the self-proclaimed experts at ‘outfoxing the box,’ and even though the odds are long and the chances are slim that we will succeed, let’s give it a try because we love you and your fees.”(1)
Author Rick Ferri has used a similar example in seminars and reports that nearly everyone in attendance chooses the exposed box—refusing to take the low probability gamble for a little extra reward.(2)
Author Larry Swedroe also reports that when the choices are this stark, investors have no problem deciding to not play the loser’s game of trying to beat the market:
In my years as an investment advisor, whenever I present this game to an investor, I have never once had an investor choose to play. While they might be willing to spend a dollar on a lottery ticket, they become more prudent in their choice when it comes to investing their life’s savings. The reason is that for the vast majority of individuals the strategy is not to retire (or die) rich, but to avoid retiring (or dying) poor.(3)
Level 3 – The Choices As We Usually See Them
The third level of this simple game establishes why index funds must eventually prevail because of low-cost then asks a more challenging question. A lot of advertising dollars are spend appealing to our human emotions and so, to many, the decision doesn’t appear so obvious. Instead it might look like a challenging tradeoff between choosing (A) last year’s top performing fund, (B), an index fund, or (C) the five-star fund. This leads to further explanations depending on your choices.
Level 4 – Winners Circle
Choosing all the correct answers lead viewers to a brief celebration followed by some more new videos that explain common concerns that arise when choosing mutual funds.
Footnotes and Credits:
1. The Coffeehouse Investor, Bill Schultheis, p56.
2. All About Index Funds, 2nd Edition, by Rick Ferri, p37.
3. The Successful Investor Today, 2006, Larry Swedroe.
Video segment 10: Morningstar report, https://personal.vanguard.com/pdf/morningstar.pdf
Video segments 8, 9, 14: The bar chart about Probability of an Active Equity Fund Beating the Market is from All About Index Funds, 2nd edition, by Rick Ferri, p.25.
Video segment 11: Sound effect from Who Wants to Be A Millionaire is public license from Soundboard.com
Bonus video Show Me The Numbers: “The stock market index fund was providing an annual return of 12.3 percent and the average equity fund was earning an annual return of 10.0 percent, the average fun investor was earning only 7.3 percent a year.” The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns, by John C. Bogle, 2007, p.51.
Bonus video Show Me The Numbers: The recurring costs of mutual funds is from The Bogleheads’ Guide to Investing, by Larimore, Lindauer, and LeBoeuf, 2007, pp 110-116.
Bonus video You Can Beat the Market: “The Relentless Rules of Humble Arithmetic” is a chapter in The Little Book of Common Sense Investing, by John C. Bogle, 2007, p. 187.
Bonus video You Can Beat the Market: The Fama and French Three Factor Model is used to explain differences in the returns of diversified equity portfolios. It’s a model that compares a portfolio to three distinctive types of risk found in the equity market to assist in categorizing returns.