Join Paul Petillo, Dave Kittredge and Dave Ng every week on Financial Impact Factor Radio as they to discuss everything from retirement to insurance, investing to estate planning, from getting started to preparing to stop.
The mutual fund investor has a great many more options available to them in the post-Great Recession marketplace. The question is: are they right for you as you make a retirement plan using 401(k)s or IRAs?
More on investing
As part of our continuing financial education on stocks and investing, I thought we'd discuss something that has stock pickers worried: correlation. Is the recent dismal performance (in 2011) of the mutual fund an indication that there are no bargains available? Possibly. But should it mean anything to you?
We are all guilty of magical thinking. We see it most commonly amongst sport figures who grow beards during hitting streaks, the magical thinking here is that somehow, the growth of hair on the player's face is somehow related to his success at the plate. Many of us have lucky shirts or believe in something that has little or nothing to do with any real world event. We are pattern-recognition machines, looking for the relation, the signal that suggests to our brains that whatever event we are experiencing must have some relation to another unrelated event. Picking stocks often opens us to this and it has been called correlation. So today, I thought we'd discuss this statistical oddity.
Correlation is basically a comparison of two variables. A rather bad example might be that those who read also have big feet. This would suggest that those who have small feet - young children - can't read because their feet aren't large enough. What's missing is often a third factor - in this case age. There are many others that make just as little sense. Indebtedness causes obesity; sincere smiling promotes longevity; a loud bar equals more drinking.
Stock pickers like to look for correlation. And sometimes, the relation between one security and another simply isn't there. Correlation has surfaced in the news recently as the stock market has moved into higher territory. Recently, Jonah Lehrer suggested that the reason some traders are better than others is genetic, relating to the amount of dopamine. If that turns out to be an accurate correlation, then no one should buy a stock without a DNA test.