Despite the wealth of information out there about the importance of managing mutual fund costs, investors still, by and large, chase performance, regardless of expense ratios.
Despite efforts to make mutual fund prospectuses more readable, most investors tend to put the job of reading them on the same level as having root canal done. That’s a mistake, but not necessarily a fatal one, according to Wall Street experts. In fact, some studies have shown that the more information an investor gets, the more likely he/she is to ignore it.
Uh, no thanks.
While the focus of federal regulators is to make sure investors get all the information they should have, critics warn that getting investors to act intelligently on that information is an uphill climb. In one study, investors were offered a choice of four index funds with varying expense ratios.
After getting some aggressively presented information on the importance of costs, only 9% of the group chose the least expensive fund. The rest chased performance, which, according to the researchers, is one of the most common mistakes the average investor makes.
Guys, we said cheaper.
Even those who actually read a prospectus are likely to be too complacent, thinking that they have all the tools they need to make an informed decision. Reading the prospectus, say fund industry analysts, is only a first step in doing due diligence. Investors who do so may bypass any further independent research in favor of making a snap decision based more on the mutual fund’s marketing efforts than their own knowledge.
Investors should also keep in mind that for every buyer of a security, there’s a seller. Investors should ask themselves whether they know something about the security that the seller doesn’t, or vice versa.