Learn from the losers of the past decade

What if I told you that for every 1% the stock market went down, you could make 2%? Sound crazy? …

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What if I told you that for every 1% the stock market went down, you could make 2%? Sound crazy? Well, most of the past decade's worst-performing mutual funds made that exact promise. Perhaps that strategy worked while the S&P 500 lost half its value from late 2007 to early 2009, but unless you're a day trader, it was — and still is — a dangerous investment strategy.

I don't recommend looking through a rearview mirror for investing advice, but I think it's valuable to learn lessons from past mistakes. So I wanted to take a look at the worst-performing mutual funds of the past decade and ask: Can we learn anything from the losers?

New maths
When I used Lipper's screening tool to find the 10 worst-performing US mutual funds of the past decade, I found that every fund on the list was managed by one of three mutual fund companies: Raffery Asset Management (managed one of the 10 funds), ProFund Advisors (five of the 10), and Security Investors (four of the 10). Come on, guys. ProFund? Security? These investments are anything but.

The worst offender lost 98% over the past decade, making a US$10,000 initial investment worth a meager US$200. Maybe you feel disheartened by your own investment returns. But believe me, scanning the loser list will make you feel downright, kiss-your-most-recent-portfolio-statement grateful.

Worst offenders
All 10 of the worst offenders boasted ultra-speculative, short-term methodologies. The funds "seek leveraged returns relative to an index and only on a daily basis" — an attractive strategy to investors who are dissatisfied with getting rich slow.

Four of the 10 worst-performing funds short the Nasdaq, including the ProFunds UltraShort NASDAQ-100 ProFund. Another two of the 10 worst-performers short the S&P 500, including ProFunds UltraBear ProFund and Guggenheim Inverse S&P500 2x Strategy Fund.

A US$10,000 initial investment in ProFunds UltraShort NASDAQ-100 ProFund would be worth less than US$1,000 today. To be fair, I wanted to see if bull leveraged funds — those which are long the index instead of short — performed any better. They did. For example, ProFund Ultra NASDAQ-100 ProFund would be worth US$15,982. But even the bull leveraged funds underperformed PowerShares QQQ (Nasdaq: QQQ), a proxy for the index, which would equal US$20,689 today.

The 10 loser funds are extremely aggressive and employ investment techniques that I don't fully understand, even after having been in this business for nearly a decade: futures, options, derivatives, forward contracts, swap agreements, inverse and imperfect correlation, leverage, market price variance, and short sale. Phew. My general rule of thumb: If you don't understand it, don't invest in it.

Most importantly, an investor doesn't need to employ any of these strategies to be successful. Leave these methods, and their awful returns, to the day traders.

A treacherous trifecta
In addition to speculation and a short-term focus, high fees, ridiculous portfolio turnover, and inexperienced management are common characteristics of the funds.

Among the worst performing funds, almost all had annual expense ratios much higher than their category averages, sometimes nearly double the average. That means more money went into the pockets of the fund managers, and less stayed in the shareholder's account.

Portfolio turnover figures for the worst performing funds also blew me away. One fund had a preposterous 1,297% turnover — meaning the fund manager completely changed every single investment in the fund nearly 13 times over the course of one year! High portfolio turnover costs shareholders more money in fees and taxes.

For most of the losing funds, the lead fund manager had been at the helm for less than three years. Tenure in this business counts. Please don't hand your money over to inexperienced managers.

Mr. Market prevails
Foolish investors know that short-term swings in the markets are not only common, they should be expected. A stock market correction — a decline of 10% or more — occurs on average once a year. But Mr. Market has a way of turning the tables. In the words of Peter Lynch: "Stock prices often move in opposite directions from the fundamentals, but, long term, the direction and sustainability of profits will prevail."

So what's the real takeaway here? As investors we have choices and are privy to a wealth of sound information. Don't be (small-f) fooled by investments that use esoteric methods and seem sketchy. If something appears too good to be true, it probably is. Look for mutual funds with solid track records, low fees, and experienced managers.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Nicole Seghetti, originally appeared on fool.com

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »