Where Did The Dollars Go?

The glitter is gone from Fidelity Investments. That's a good thing.

The old Fidelity was one of golden boy stock pickers--Edward Johnson III (whose family controls the company), at the start of his career; later, more famously, Peter Lynch of the Magellan Fund. The new Fidelity is all about slick 401(k) administration and fast back-office computers. No one gets excited about Fidelity's fund performance anymore. Michael Maiello reports in "Ferrari or Buick?".

The truth is that Magellan, Fidelity's best-known offering and for a while the world's largest mutual fund, didn't make very many people prosperous. Lynch took it over three decades ago. Nimbly working a tiny portfolio, he produced spectacular results, which attracted billions of dollars of new money. But after Magellan got big its results sagged. Lynch left in 1990.

The usual way to measure fund performance is a woulda-coulda game: what would have happened to a sum invested years ago and left untouched. By that score Magellan looks outstanding. Over the 30 years ended July 31 it has averaged a 16.3% return, four points ahead of the market.

This performance, though, is nothing like what was experienced by the average Magellan customer. A lot more of these guys were around to experience the mediocre results of late than the spectacular results of the Lynch years. Magellan's dollar-weighted return, which weights each period's gain or loss by the dollars at stake, has averaged only 10.3% a year since 1978.

Don't blame Fidelity. Blame the customers for crowding in at the top. Or blame business journalists for making stars of stock pickers. Maybe we failed to confess, often enough, that past results are only a weak indicator of future ones.

Where does that leave Fidelity and its 24 million customers? Seeking efficiency, not performance. Fidelity's tax-exempt sweep fund for brokerage accounts pays a quarter of a point better than Schwab's. For busy traders, its $8 commission beats that of other discounters. In running low-cost index funds Fidelity can hold its own against penny-pinching Vanguard.

If you want a prosperous retirement, watch your costs. Care a lot about the dollars that get frittered away in trading fees, taxes and fund expense ratios. Don't chase the fool's gold of hot stock pickers, even ones that make the cover of a magazine