ValueWalk has a fascinating story posted about the worst mutual fund that ever existed.
The fund was guilty of three things that, when repeated over years or decades, are almost guaranteed to destroy wealth rather than create it. We’ll call it the Trifecta of Terrible:
– Charge high fees
– Trade constantly
– Time the market
The fund in question, originally called Steadman and later rebranded as Ameritor, managed to turn a $10,000 investment in 1961 into $1300 by 2011. Forty years of the Trifecta, working it’s black magic on investor capital.
Here’s the Dividend Growth Investor on the fund’s fatal flaws:
The fund manager constantly bought and sold stocks, which resulted in high commission costs and taxes on capital gains. Because the fund manager constantly timed the market, they did not let their investments compound at all. They were constantly chasing hot stocks, which usually results in buying high and selling low. If you constantly try to pick the top or the bottom, you are doing yourself a disservice, because you are not letting your investments compound on their own.
The other mistake with this fund was the high expense rate. Towards the end of the study period, the amount of assets had dwindled, while the amount of expense remained the same.
You would shocked at how many funds and strategies I come across, to this very day, making these same errors. Only they don’t look or seem like errors to the managers of the funds, they are the very justification for the managers’ existence. “If the market is open, and I’m at my desk, it’s game on.”
Their end-clients either don’t know any better or are enjoying the experience.