I often get frustrated when newspapers, news websites, and media organizations (not individuals) make obvious and correctable errors. In an article attempting to answer the reader question, “Can I invest in the stock market without the aid of a stockbroker?“, MSNBC stated the following: (emphasis added)
Mutual funds still carry the risk that the investment manager won’t pick the right stocks either. For every fund that beats the market average, there’s another one that fell short by the same amount. (By definition, only half of the funds can offer returns that are “above average.”) If you subtract the fees that mutual funds charge to pay the investment manager and other expenses, the average return of all funds is going to be less than the overall return of the market you’re investing in.
To see the error, imagine a small stock market that only has 100 people. If the definition of “average” is the median return on investment, then fifty investors must be below the median and fifty above the median.
Now modify our definition of the market, it has 100 people–fifty solo-investors and fifty mutual fund managers. Fifty people still must be below the median, but which fifty people? It could be any mix of solo-investors or mutual fund managers. All fifty of the managers might be below the median, all fifty might be above the median, or any other mix.
MSNBC’s mistake was to not recognize that mutual fund managers are not the only investors in the stock market. It is not true that half of the mutual fund managers must be above the median and that half must be below the median. (It is true that if we compared mutual fund managers to only other mutual fund managers, then half of the managers must be below the median of the average mutual fund manager.) In fact, only 10% of all mutual funds are above the median. Said differently, 90% of all mutual funds are below the market average.
The MSNBC article overstates the performance of mutual funds, but that is not my major complaint. I think it is unacceptable that a financial advice article from a large news organization (with the resources to catch mistakes) makes such a simple error: misapplying the definition of median.
