I was looking through the Barnes & Noble bargain bin and found a book called “How to do just about everything”. Okay, how to unplug a toilet… how to carve a turkey… hey, a personal finance section! Wow, quite awful. After coming home and looking up the book, I found out it was by eHow.com. I should have known. Check out this gem on How to Select a Good Mutual Fund (eHow link), which offers the following advice:
2. Determine how many mutual funds you will invest in. Three to five funds is generally considered an adequate amount of diversification.
Yes, let’s determine diversification by the actual number of funds. One… two… three… done! Never mind that I could easily have more diversification in one mutual fund than in 15 separate niche funds. This is like deciding the best book is the one with the most pages. At least later on it says to vary the size of companies in the funds. However, there is no mention of real diversification between stocks vs. bonds, domestic vs. international, passive vs. active management, etc. What else?
5. Choose high-performance funds by using Internet resources and newspapers to pick those funds that have had the best performance over at least the last three years.
Huh? I don’t know how the advice could get much worse than this. Picking whichever funds that had the best performance over the last three years will virtually guarantee that you will have below average returns going forward. Check out these articles on the persistence of mutual fund returns based on studies of actual mutual fund return data over decades. “The majority of well-done studies tend to support a lack of persistence for all but the worst performing equity mutual funds.”
Don’t chase performance! Again, we see no mention of better indicators like expense ratio, turnover ratio, tax-efficiency, manager ownership of shares, etc.
Content Mills Warning
So how does such a poor article get prominent placement in search engines, not to mention published in a book? eHow is a content mill that encourages people to churn out large numbers of articles with low quality standards, promising them a cut of all future ad revenue. Google has recently penalized them for their low-quality articles as well.
In addition, eHow has a history of treating their freelance writers poorly, and their most recent move was to cut off their share of ad revenue completely, offering them either a lowball buyout or nothing. I’m sure they have some good articles, but in general I would say you’re better off avoiding them, especially for money-related topics.