The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

A Fake Hatchet Job ?

Hundreds of times, I’ve posed the question of “is 6% a good portfolio return?”  The answer, of course, is — it depends!  If you take very little risk and get a 6% return, it is a good return.  If you take a lot of risk and only get a 6% return, it is a terrible return.  Your return has no meaning without knowing how much risk you took.

You would expect a novice who knows nothing about risk and investment management to make the mistake of ignoring risk, but you would expect something more from The Wall Street Journal.  They just completed a lengthy expose’ on the use of Morningstar’s star ratings of mutual funds, which is the starting point of any discussion of mutual funds.  A fund can have as many a five stars, but that doesn’t have any predictive value.  Few five star funds remain that way for ten years.  Their investment returns can vary wildly from very good to very bad. 

Morningstar doesn’t promise that a five star fund will increase in value.  They look at the risk-return relationship of the mutual fund, the level of fees charged in comparison to similar funds, the qualifications of the portfolio manager, the strength of the mutual fund sponsors and other factors.  Morningstar merely estimates if the particular fund has the tools and integrity to continuing earning five stars.  There is more to life and more to investing than getting a 6% portfolio return.

Your independent judgement of mutual funds cannot be out-sourced, but Morningstar is a good place to start your studies.  It is a launch pad, not a landing pad.

One would not expect to read “fake news” in the conservative Wall Street Journal . . . nor an article as misleading as this one.  What did Morningstar do wrong to deserve such a “hatchet job?”