The tendency for mutual fund companies to drop poorly performing funds when calculating historical return data is a major problem for unsuspecting investors, and it’s known as survivorship bias. An investor selecting mutual funds today is choosing from a list that excludes the losers that have been either closed or merged out of existence so that their poor returns disappear.
For example, Morningstar reported that of all the traditional U.S. mutual funds operating in 2004, 40 percent had shut down before 2014. Perhaps even more surprising, Morningstar also found that of the funds it rated five-stars in 2002, 20 percent didn’t survive the decade. And an astonishing 61 percent of the one-star funds survived the full 10 years.
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