Posts Tagged "proportion"

Picking investments based on past performance

Posted by Preet on Jul 29, 2007 | 0 comments

Invariably people will see a ranking of highest performance funds for the last year or so and ask “Are these good funds?” Others will just go and blindly buy them. In fact, there is a huge proportion of investors out there who base most of their decision on the past performance of an investment alone.  They do not research any further than the performance report for the last year.  This is no different than gambling in my eyes!

To paraphrase a quote I once heard, if all that was involved in achieving the highest rate of return was looking at past performance – librarians would be the richest people on earth! Last time I checked, they were not (at least on average).

In fact there have been numerous studies that have looked at mutual fund rankings year over year.  What they all find is that the #1 performing mutual fund over the last year will be very close to the worst performing fund the next year. These studies are numerous and they all have the same results.  In fact, the worst performing funds also have a tendency to shoot up the rankings the following year.

So what does this tell us?: That you cannot blindly look in the newspaper and look for last year’s best performing fund and expect it to give you the same performance every year.  In fact, if you take nothing else away from this post take this: Next time you see a mutual fund returning over 50% in the last year, take a look at it’s 5 and 10 year averages.  If the longer term averages are, say closer to 10%, then doesn’t it stand to reason that to revert to the mean will require some dismal performance in the future?

What I’m really trying to advocate is that you should take some time to get advice and do some research on what you are buying.  I’m convinced that people take more time choosing between fridges for their house than they do their long term investment selections! I realize that a lot of people are quite intimidated by the task, but do your due diligence! Again at the very least, if you are still going to go out and buy yester year’s hot performer – ask for a professional’s two cents on the fund first! Even the fund company who sells the fund will tell you not to expect the performance to continue forever!

How do banks make money on Savings Accounts?

Posted by Preet on Jul 25, 2007 | 0 comments

You’ve all seen the adds for the “no fee” savings accounts being offered at various institutions. Have you ever wondered how the banks make money on those accounts? To really simplify it, it is basically as follows: When you deposit your money into a savings account, you agree to be paid interest from the bank, which for the purpose of this post we will say is 4%. Now the bank will take that money and turn around and give it to someone in the form of a mortgage so they can buy a house and charge them 6%. So the bank COLLECTS 6% from mortgage holders and PAYS 4% to savings account holders. The difference between the 6% and the 4% is known as “the spread”.

Of course it is not so cut and dry in that a bank can’t take $1 million in savings accounts deposits and then just go out and give $1 million in mortgages.  What happens when people need to access their savings? The banks have certain ratios they abide to with respect to how much they lend out as a proportion of the deposits they receive.

And of course the more traditional “bricks and mortar” banks also tack on monthly fees to your accounts – which REALLY ADD UP.  Remember: If you are continually amazed by how much profits banks are churning out, you can complain or you can buy their stock! :)