Surrounded by Bad Investing Advice

CBS Marketwatch published a horrible article today on using leveraged ETFs to beat the S&P 500. In the article, author Bill Donahue discusses a couple of ideas that he thinks are slam-dunks and no more risky than just investing in the index. This sort of reporting not only annoys me, but I find it to be irresponsible.

The first problem is that beating the S&P 500 isn't a slam-dunk. If it was, the 70% to 80% of fund managers that fail to do so consistently would be having such a hard time of it. In addition, Bill's assertion that his ideas don't involve additional risk seems flawed. It's a generally accepted principle that the pursuit of higher returns is accompanied by higher risk. I doubt Bill has found the holy grail of investing.

More specifically, Bill recommends that his readers invest in the Rydex Nova Fund (RYNVX) whose objective is to earn 150% of the S&P 500. As proof of this funds abilities, Bill writes that, "The fund has met its daily objective consistently." I don't know what time period he referenced, but this assertion seems like nonsense to me. Take a look at the chart below. In it, I compare the Rydex Nova Fund to the S&P 500 over that last 12+ years.

See a problem there? I do. This fund that supposedly beats the S&P500 by 50% actually did no better than the index and in fact it's a little lower as of March 18, 2007. Thanks for that tip, Bill!

The article then offers up this tidbit. "During down markets like the 2000-2002 bear market, both the fund and the index should have been avoided." Good stuff, wouldn't you say? In a down market, you shouldn't be invested in stocks. Good thing we can all tell when the market is down before it goes down!?

All of this leads me to something I've said before. Make sure you check your assumptions before investing your hard earned money. And don't blindly follow anyone's advice even it comes from a reputable publication.