Tabloid's investing chimp highlights misperceptions

Your Funds

February 12, 2006|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

Plenty of people believe that mutual funds are such a simplistic investment that an educated chimp could pick a good one.

But that doesn't mean you want to monkey around with that chimp's advice.

"Sammy, the chatting chimp" claims to provide "astute accounting advice" in his column in the Weekly World News - the supermarket tabloid known for its extensive coverage of space aliens and Bigfoot - but what he really does is give a voice to some common misconceptions about money.

Now I don't put too much stock in Sammy, but cynics would say that's because I'm trying to protect my job from a competitor. In reality, it's because the most simple advice often advances stereotypes and misconceptions. For proof, let's look at how the chimp answered a recent question from William Drake of Houston, who wanted to know, "What exactly are mutual funds, and do you think I should invest in them?"

Sammy suggested that mutual funds are what an investment company offers to speculators: A chance to buy `shares' of their market expertise. "About 80 percent of mutual funds underperform the average returns of the stock market. If you have a whole lotta bananas to invest for the long term, they're a good buy. But if you only have a small amount of savings, put it safely in the bank for now," the chimp said.

Even if you don't put much stock in the Weekly World News' reports of Satan filing for bankruptcy or Bat Boy running from the law, Sammy's advice sounds about right, not much different from what you might get at the corner coffee shop or sitting around waiting for a haircut.

Now it's time to make a monkey out of the chimp. Mutual funds offer diversification and professional management at a reasonable price. A fund's share price represents the value of its underlying assets, and its expense ratio is the price you pay for the management.

Talk to almost any industry executive who is not employed by a firm that runs funds used in market-timing, and they'll suggest that funds are for long-term investors rather than "speculators."

As for the percentage of funds beating the market, 80 percent is more of a bull-market leftover than a recent statistic, but the entire concept is just a bit misleading. One reason why some funds don't outperform the broad market is that they're not trying to, focusing instead on a slice of the investment world.

Standard & Poor's measures the performance of funds against their appropriate benchmarks, and called the battle a stalemate in 2005. More than 55 percent of large-cap funds beat the Standard & Poor's 500 last year, and yet only one in four actively managed mid-cap funds were able to beat the S&P MidCap 400.

Over the past three years, the S&P 500 has outperformed 62 percent of large-cap funds, still well below Sammy's warning.

The lesson is that you're buying an individual fund, and not a statistic, and that you either find one whose management and fees make you comfortable, or you choose a low-cost index fund and satisfy yourself with market returns.

jaffe@marketwatch.com

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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