Is it fun? No. It's fundamental! [Certain Times]

This week a surgeon from Washington forwarded an email he received from his hospital’s 401k administrators.

“We believe the ABC Funds offer the best overall value to participants, given their blah blah blah and results that have outperformed the XYZ Funds [that you own right now],” the message said.

It seems the bean counters found some mutual funds with better historical returns, so they made an across-the-board switch in this guy’s 401k account.

It’s not unusual for people to chase performance. In fact, it’s one of the more common investment mistakes. So I was concerned that the administrators might be making a mistake with my client’s 401k money.

Delving into the details, I saw that ABC had actually beaten the pants off XYZ (a well-respected company whose name has been redacted to protect the innocent). Since lots of physicians own the XYZ Funds in their 401k’s, my investment advisor antenna started sparking like a lightning rod.

I just had to know how ABC beat XYZ.

First I checked the asset allocation—the mix of stocks and bonds—used in both groups of funds.

Asset allocation usually accounts for more than 90% of the performance difference between fund, but in this case, the ABC and XYZ funds were allocated almost identically.

Then, I checked the market capitalization of equities owned by both funds. ABC had a slight tilt toward small cap stocks, but not enough to explain the big difference.

But then a little sliver of data caught my eye: the “style history” comparison. Style history is a year-by-year look at how a fund’s mix of stocks and bonds has changed over time. And what I saw there explained everything.

Between 2009 and 2013, the concentration of stocks inside the ABC Funds drifted gradually from 83% down to 79%.

In the same period, the XYZ Funds started at 60% stocks, then shrank to 40%, then sprang up to 80%. XYZ was jumping around like kids on the trampoline in my back yard. (Note to pediatricians: We do have a safety net around our trampoline and flips are strictly prohibited.)

And ABC? They clobbered XYZ by standing their ground while stock prices rose.

As an institution, XYZ made the same mistake that individual investors often make: they jumped in and out of the markets.

Fortunately for my client, the 401k board was making a smart move. Nonetheless, some physicians tell me they are still “playing around” with their 401k accounts (their words, not mine), and I want you to know that it’s an expensive form of entertainment.

Next time you’re looking for something interesting to occupy your mind, do what my kids do: go outside and play. Or better yet, find yourself a stodgy old investment advisor (like me) who will hook you up with a strategy that’s so mundane… so fundamentally boring… that you can stop worrying about your money and go have yourself some real fun.