The Most Meaningless Metric of Them All?

Though low-cost ETFs have become much more popular over the past decade, mutual funds are still a popular choice -- especially for inexperienced investors. At the end of 2012, 265 million people had invested more than $13 trillion in about 7,500 funds.

Because these funds -- which typically underperform the S&P 500 -- are popular with novice investors, there is a clever trick fund companies can play to make it appear as though their funds are performing better than they really are. Although technically true, this trick disingenuously gives investors a number that means little.

If you're looking to invest in mutual funds, and the historical performance of those funds matters to you, check out Motley Fool contributor Brian Stoffel's video on what this trick is, and how to avoid it.

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Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 03, 2013, at 9:54 AM, PEStudent wrote:

    These "teaser" articles violate the guiding rule on the side of "please be respecful."

    This treats us readers as if we're just pawns to be played with by the Fool's management.

    Running a headline and then telling us we have to read something else - after providing personal information - is pure manure.

    Besides, the trick they don't tell you about is that the funds often compare themselves to other funds in the same sector. But those I've had also compare against the S&P 500.

  • Report this Comment On July 03, 2013, at 11:32 AM, TMFCheesehead wrote:

    @PEStudent-

    I'm not 100% sure what "else" needs to be read. The video was included because I've attempted in the past to explain the difference between AAR and CAGR on paper, and believe a visual representation would help supplement that.

    Brian Stoffel

  • Report this Comment On July 04, 2013, at 7:02 PM, mountain8 wrote:

    I have to agree with cheesehead. I believe they treated us readers as uninformed pawns of some MUTUAL FUND MANAGERS. And I thought they did that "with respect"

    I didn't read anything else. And what personal information are they talking about?

    They don't have time enough or paper enough to tell us ALL the tricks financial managers use to grab our money. The title only specified one metric and they backed it up by explaining that one metric and it's flaws. And I agree that metric is probably the least valuable metric used.

    Thanks for the video. Very clear. Very concise. Very valuable to me.

    People shouldn't talks finance when they are stoned.

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