Another Reason Not to Invest in the "High Fliers" -- You'll Never Get the Advertised Returns

In Why You Shouldn't Listen to the Financial Media (and What They Don't Want You to Know), I noted the dangers of listening to financial media too much and too often. Doing so can get you off your investment strategy, not to mention rack up lots of costs that drive down your investment return. And now, Kiplinger's has a piece that says not only are there these problems, buy you won't even get the "great" return on the investments that the media does hype. The details:

The difference between a fund's published returns and what investors actually earn is the subject of important new data from Morningstar. The fund rater looks at dollar-weighted returns, or how much money the average dollar invested in a fund earns over time. These "investor returns" take into account a common error that too many of us make: buying funds when they're hot and selling them when performance drags.

Morningstar's figures underscore the emotional dangers of investing in high-octane funds. Over the past ten years to November 1, investors in the most volatile 25% of mutual funds earned, on average, only two-thirds of the funds' average reported total returns. "Volatile funds inspire fear and greed and make people handle their money poorly," says Russ Kinnel, Morningstar's director of fund research. "They buy after the fund has made a lot of money and sell after it has lost money."

So here's what happens:

1. A fund takes off, and the company that markets it (as well as the financial media) tout it as a high-flier.

2. Investing novices jump in (note: this is after a big jump -- not before it.)

3. The fund may do well or it may not from there. But when its year-end report comes out and it touts 25% annual gains, the novices may see some or none of that gain. For instance, they'd see some if the fund was up 15% when they bought in, none if the fund was up 25% when they bought in, and they'd even lose money if the fund was up 30% when they bought in.

So what's the alternative? You guessed it: index funds. I know, boring. But if you want good investment returns, boring pays.