The problem of financial reporting on mutual funds: How do we know which one is “best”?

I was reviewing my IRA quarterly performance statement today, the legal form that gives statistics about the performance of mutual funds over the last quarter. The sheet has about 400 statistics reported, from 8 to 9 figures for each fund.

As I type, an ad for T. Rowe Price is playing on the television, and a disclaimer is recited “past performance is not indicative of future results…, etc.” Of course not. All their funds are above average. Isn’t that true for every company? At least, it seems that a lot of them are well above average.

What’s going on is that some figures are not reported. For example, these companies have a way of eliminating the negative results—my company merged several of its funds out of existence a few months ago, automatically combining funds in several funds into another account, thus eliminating the need to report on the poor performers. My statistics sheet fails to report those earnings or lack thereof; returns for those dog accounts, going back 5 years and 10 years, or since inception, just disappear from the books!

In this case, financial firms don’t have to report their one-star funds. They just make them go away, like they never happened! It’s truly a case where the funds are like the kids in Lake Wobegon—all the funds are above average.

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