We're All Surrounded By Bad Investing Advice

CBS Marketwatch published a horrible article [article has since been removed from the site] 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.

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  1. Thank you for pointing out the stupidity of the article and its hindsight advice. Did the author point out what happens to leveraged ETFs in a market that doesn't have an incredible upward bias like what happened last year (once in a generation folks). No. Over time, leveraged ETFs suffer value decay in horrific fashion due to daily rebalancing. Leveraged mutual funds would behave no differently. They are such horrid investments over time that I've actually been shorting dual pairs of leveraged ETFs for double digit gains for some time now. It's really an incredible strategy and I finally got around to posting the results, screenshots from my account, etc. Bottom line - something that's so bad long makes a nice short. Dropping links isn't usually my style, feel free to pop in and do the same; just wanted to share this one since so relevant and timely:


  2. Developed multiple arbitrages for the financial markets. Arbitrages that produce just a few percent a year, to arbitrages that produce over 30 percent a year.

    In 2001 i started developing, as of now, a dozen arbitrages. I lock in an X percentage, and Y time later, i close out the arbitrage. Over 30%/yr.

    Risk-Free Investing is not only possible, but in abundance. Just that people are told and taught that it is impossible. No risk has been in front of all, but not seen.

    The market is unlimited.

    Thomas Adair

  3. A while back a colleague and I put up a web site on the Index Roll, a leveraged index technique using LEAPs, and wrote an article for Seeking Alpha called "Indexing on Steroids" that was carried by Yahoo Finance and many other sites. You may have read it.

    We just wrote another article you may be interested in for your blog: "Leveraged ETFs: A Value Destruction Trap?" It shows the perils of a fund trying to maintain constant leverage during a bear market, which is what the Ryder and ProShares ETFs do. In order to maintain their leverage ratio, these funds buy lots of shares during a bull market, and then sell them all during a downturn, with devastating results.

    Here's the URL:


  4. Avatar photo


    You're right that I didn't explicitly account for dividends from the Rydex fund. I also didn't account for them from the S&P 500. I have, however, taken a look at Morningstar's Total Return calculations which I believe does include dividends. When such dividends are included, it appears that the S&P 500 has performed better.

  5. Hello, I just had to comment....On the surface your investment analysis appears compelling but the chart of the mutual fund is not a measure of its total return, only its price history. Your analysis is in fact flawed. Mutual funds make distributions which reduce the net asset value (price) on the ex-dividend date and are in turn reflected as a lower return if you do not account for the additional shares you receive through dividend re-investent or the receipt of capital gains and dividends in cash. Please find the distributions for the RYNVX fund over just the past few years. I believe if you account for these distributions and increase the number of shares to reflect the distributions, you would have an accurate depiction of how the total return of the two investments would compare. Cheers!

    20-Dec-06 $ 2.014 Dividend
    30-Dec-05 $ 0.297 Dividend
    23-Dec-05 $ 0.553 Dividend
    31-Dec-03 $ 0.005 Dividend
    12-Dec-03 $ 0.005 Dividend
    16-Nov-01 $ 0.052 Dividend
    27-Jul-01 $ 0.073 Dividend
    6-Nov-98 $ 0.411 Dividend
    5-Dec-97 $ 0.051 Dividend
    4-Dec-96 $ 0.25 Dividend
    21-Jun-95 $ 0.888 Dividend
    23-Dec-94 $ 0.21 Dividend

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