Wow, look! This fund made 522% for the past 10 years or 15.21% per year! The fund manager is top in class and you should invest in this.
It is very typical to be shown an investment performance chart like the above. The fund becomes a convincing ‘buy’ since the manager was able to deliver high returns over a long period of time. But unfortunately, the returns is a misleading one.
Unit Trusts, ETFs and Hedge Funds report their performance using a technique known as time-weighted returns and the reported returns often result in a wrong inference for investors.
You can lose money even in the best performing fund
Peter Lynch is a well-revered mutual fund manager given his track record of an annual return of 29% over a 13 year period running the Magellan fund. It was reported that Fidelity conducted a study (but I couldn’t find the actual report) on the Magellan fund from 1977-1990 and found