One Of The Most Common Lies Told By Mutual Fund Salespeople

by: MA Capital Management

A good number of people reading this article have been affected by market jitters, and may have even moved all their investments to the sidelines. I can even predict there are more readers who have called their advisor or mutual fund sales person to liquidate during these jittery times, but were talked out of doing so. I have no doubt their advisor told them (in a very calm, reassuring voice) that "everything will be fine, markets have ups, as well as downs, but in the long run as long as you remain diversified and stay invested you will come out ahead".

The advisor then inevitably presented the evidence that proves this statement. We have all heard this evidence and seen graphic representations of it. At some point, we may have all even been convinced by it. Your advisor may even truly believe in it. It goes something like this:

"I know times are tough right now and you are losing money, but after large falls in the markets you always have large bounces. If you get out when times are bad you will miss these large bounces. Has anyone ever showed you what your returns will be over the long term if you missed the 10 best days in the market?"

At which point a graph like the one below would is put in front of you……

Click to enlarge Source: Yahoo Finance, MA Capital Management

One has to admit that the argument to stay invested over the long term is very compelling. But is your investment professional showing you the whole picture? Some years ago, when I was presented with a graph like this, I said "Fine, but what would it look like if I was able to time the market and miss the biggest down days?" My advisor at the time had no idea. They had no such graph. Instead of finding out the answer, they just continued to tell their misleading story. I've prepared such a graph for you below.

Click to enlarge

Source: Yahoo Finance, MA Capital Management

As you can see, had an investor moved money to the sidelines during the 10 worst days, you could have beaten the market handily. In fact, the investment portfolio could end up more than doubling the market's performance. Now, I am not suggesting you haphazardly try to time the market. I'll explain more about this later.

The story does not end here. Long-only investment advisors are shrewd, and many would see right through the above graphical representation. They would quickly retort that if you were lucky enough to see the big down days coming, you would undoubtedly miss the biggest up days because they always happen immediately after. Fair enough. But what if you missed the 10 biggest down and up days? How do these results compare to the actual market performance? To speed up the analysis, I have enclosed these figures for different time periods below.

If I invested $100 in the S&P 500




Missed the 10 Best Days

Missed the 10 Worst Days

Missed the 10 Best and Worst Days


Just Held

Since 1980





Since 1990





Since 2000





Last 10 Years





Last 5 years





Click to enlarge

Source: Yahoo Finance, MA Capital Management

What you we see is that in every period, the long-only investment advisor is not telling the full truth. In every period, if you put your money on the sidelines and missed the biggest down days, you cannot only afford to miss the biggest up days but you end up beating the S&P Returns every time. On top of beating the market, there is one more benefit of missing the biggest down and up days. When your money is on the sidelines, you do not have to worry. You can sleep well at night knowing that your capital is preserved and you do not have to endure those gut wrenching investment statements that follow large down periods.

In fact, the only argument left for the long-only advisor is that they may say, "Look, this analysis is fair but what if you are wrong? What if you put your money on the sidelines and the market does not go down at all? In order to play this game you have to be able to time the market". Again, this is not totally untrue but biased towards their products.

Large downtrends in markets do not appear overnight except when unexpected events happen like 9-11. In normal market conditions, markets show clear signals in their price movements to indicate a down trend or an uptrend. For an average investor, these trends are very difficult to spot. However, for a trained professional with a systematic investment philosophy, and using complex software that is designed to track these trends, the signals to move your investments to the sidelines become much easier to spot.

Funds that run such trading systems have been around since the advent of computers and are generally called Managed Futures Funds. They use futures instead of stocks because immediate liquidity is needed to sell the portfolio when times are bad. Their results are tracked by many different Commodity Trading Advisor indices. Much to the chagrin of long-only investors, their results are stellar as compared to the S&P 500. Over the long term they not only outperform the S&P 500, but they do so with much lower volatility. This avoids the dreaded large loss on your Investment Statement and the sleepless nights. Below is a comparison of the Barclay CTA Index and the S&P 500. The Barclay CTA Index is a leading industry benchmark of the representative performance of Commodity Trading Advisors. There are currently 582 programs included in the calculation of the Barclay CTA Index. This index is not weighted, and is rebalanced at the beginning of each year.

Click to enlarge

Source: Yahoo Finance, MA Capital Management

Clearly the argument that an investor must remain invested in the market in case he or she misses the biggest up days is not a true reflection of reality. You can afford to miss those gut-wrenching volatile periods, and there are many investment products that are designed to do just that. If your investment advisor has not heard of Managed Futures, then they are not doing their job of keeping you truly diversified.

Like any product there are some Managed Futures products that are better than others. An experienced advisor should be consulted and proper due diligence performed before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.