 |
InvestWELL Report |
|
|
| |
|
July 07, 2007
Hello,
We hope you are doing well.
Since the last month, the market has been caught in a trading range. It appears that there may be a potential correction in the coming months. Contrary to popular beliefs, corrections are actually healthy since they remind many people that the market can go in both directions.
Our next InvestWELL Report will be released on August 4, 2007.
(following the Labor Report which is generally recognized as a "market mover").
Derek Polcyn,
President
Investment
Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz
|
|
Question:
Can a survivorship bias impact my returns in mutual funds?
Answer:
Yes, if you hold actively managed funds.
The survivorship bias is the tendency for poor performers to drop out while strong performers continue to exist. This results in an overestimation of past returns. A recent study, sponsored by Morningstar, indicated that survivorship bias accounts for about 1.6% returns per year.
Here is a direct quote from the study "Hidden Bias in Morningstar Data Systematically and Significantly Overstates Managed Mutual Fund Performance".
Here is how it works. A mutual fund company has a number of funds on the market. Some of these funds are clearly underperforming the market. The mutual fund company decides to liquidate the underperforming funds. Down the road, the mutual fund company reports the performance of its fund excluding the performance of the funds which did poorly and no longer exist. If you held the liquidated funds, your investments did poorly, yet the marketing material does not show it.
|
| |
|
|
Assume that the long-term index return is 10% per annum and a mutual fund company claims that its funds returned 9% on average. If the mutual fund company has a survivorship bias of 1.6%, by how much did an index really outperform?
A) 2.6%
B) 2.1%
C) 1.6%
D) It cannot be determined exactly
Answer to the Quiz
at the bottom of the newsletter
|
|
|
(Cumulative %)
InvestWELL Picks has pushed ahead of S&P 500 index by a considerable margin.
One of the stocks we hold has had a sizeable gain.
Investment Strategy – MEMBER SECTION
Chart 1.
|
|
|
- During the last month, the US equities have traded in a narrow range (Chart 2 & 3). The market has had a very good run for the last 3 years and it is trying to make up its mind in which direction to go now.
Charts courtesy of StockCharts.com
- During the last month, the Canadian equities have also traded in a narrow range reflecting the uncertainty of the US market (Charts 2 & 3).
Charts courtesy of StockCharts.com
- Last month, the US employers added 132K new jobs, while keeping the unemployment rate steady at 4.5%. The labor picture brightened with the upward revision of the additional 33K new jobs in May.
- Last month, the Canadian economy added 35K new jobs. Despite this gain, the national unemployment rate remained at 6.1% for the fifth consecutive month, as more people entered the labor force in June in search of work.
- Some economists are already starting to use a new term - housing recession reflecting the falling property values and its spillover effect on retail sales and consumer credit
- Many market pundits believe that the bear market in U.S. Treasuries is just getting started as investors turn their attention to the strengthening labor market and faster inflation instead of the decline in home prices.
- The Canadian dollar roared to its highest level (95-cents) in more than three decades after a strong jobs report boosted the likelihood of higher interest rates. The currency rose after a report showed the economy created more than twice as many jobs as were expected. The Bank of Canada will be making the interest rate decision on Tuesday. Most of the economists believe the Bank will increase the bank rate.
|
| |
|
|
(see
explanation)
Here is a direct quote from the Behavioral Section in last month's Member newsletter:
"Overall, given the mixed picture, we may be heading for a range trading rather than an outward downturn".
So far, we are right.
Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
|
|
B is correct.
As stated, the index outperformed the company's funds by 1% (10% - 9%). In addition, the survivorship bias is 1.6% per annum. The calculation is as follows: 1% + 1.6% = 2.6%.
|
|
Thank you for reading InvestWELL Report.
InvestWELLFinancial.com
|
|
|
The contents of this publication are the property of InvestWELL Financial and may not be summarized, reproduced, or rebroadcast in any fashion without our written permission.
InvestWELL Financial’s first priority, as a provider of independent and unbiased financial information, is to educate our clients. Not only do we provide practical information about securities, but we also coach our clients to become successful independent investors. As such, InvestWELL Financial does not assume any responsibility whatsoever for the use of any information from the website or related publications. Although all sources of information are vetted and the information is believed to be reliable, it is not provided as investment advice. Past performance is not an indicator of future performance in securities. Each portfolio must be balanced and based on personal circumstances. High-risk investment decisions should be made in consultation with an investment professional.
InvestWELL receives no commission or benefit of any kind from the companies whose securities InvestWELL Financial showcases. We do not necessarily own shares in the showcased securities, but if we do, these shares would only form a very small part of widely-held and publicly distributed companies. There is no intention whatsoever of profiting in a manner where the price-impact of trading or holding of a security might arise. The website and related publications of InvestWELL Financial are intended to only be used for educational purposes.
|
|
