The Herald Bulletin

Morning Update

Local Business

January 24, 2014

'Big Joe' Clark: Investors misfocused on benchmarks

Many investors will begin to see more disclosed to them as they open their financial statements when mutual funds are involved. It’s hard to not obsess over fees and performance when it comes to investing, but more times than not, this frustration is misplaced.

The Labor Department has been trying to squeeze out the excessive fees charged by mutual funds and increase transparency so consumers have a better idea of what they are investing in. The new regulations have turned a spotlight onto the mutual fund industry, evoking anger out of high fees along with poor performance.

However, many of the fees built into a mutual fund still do not show up as a line item on a statement. This seems to be heading down the right track of increased transparency but we are still a ways off from where the industry needs to be. While high fees can eat into an investor’s long-term performance, we must not lose sight of can have the largest impact on an investment account – disproportionate risk taking.

The main misfocus investors have when it comes to their investment performance is comparing it to a benchmark as the sole factor for success or failure.

As a population we get obsessed with outperforming something that doesn’t matter. We are always chasing after the next big thing and often for all of the wrong reasons. For example, one of the top hedge fund managers during the financial crisis, John Paulson, made 591 percent for his clients in one of his funds. He was king of the world and he saw massive inflows as investors threw money at him hoping to ride the money train with John Paulson as the conductor. Except Paulson’s money train all but fall off the tracks as one of his funds fell 51 percent in 2011.

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