If you had been brilliant enough to get into an Ivy League school, do you think you would be a wiser investor today?
The answer is probably no. Ivy Leaguers may know how to separate DNA and write a cogent essay on the rich symbolism in Anna Karenina, but in a recent study, the brainiacs bombed miserably on - get this - an open-book test.
The study, which was designed by three professors from Harvard, Yale and the University of Pennsylvania, examined whether highly educated people could figure out how to correctly pick an index mutual fund.
You'd think this would be a slam dunk, especially since the experiment's guinea pigs were Ivy League undergraduates, as well as graduate students who were almost all enrolled in the MBA program at Penn's Wharton School, which is famed for its business programs.
When they applied to college, the MBA students received average SAT scores that vaulted them into the 98th percentile of test-takers, while the undergraduates did slightly better. No slouches in this cohort.
The professors gave each of these overachievers a hypothetical $10,000 and told each one to invest in one or more index funds. They could divide the money any way they wanted among four fund choices, or sink it all into one. All the funds were linked to the Standard & Poor's 500 Index, which means each fund invested in the same 500 blue-chip corporations.
You may think that choosing the superior investment among four funds that invest identically would be like ripping open a package of No. 2 pencils and picking the best one. The study, however, offered a clear choice. And the experiment's designers did everything short of pointing a giant flashing neon arrow at the right answer.
The students were given all the background materials they needed to ferret out the superior fund, including a one-sheet handout on each fund's expenses. They also were expected to read through each prospectus, an admittedly stultifying document.
Ultimately, the students flunked their challenge by focusing on stuff that was as relevant as yesterday's surf report. The amateur investors seemed convinced that what mattered most was the investment equivalent of box scores. Many of them placed the greatest weight on the cumulative performance of each fund. The funds, however, were launched at different times, which means the running performance tally was meaningless.
Our bookish investors appeared oblivious to what really matters when picking index funds: low expenses.
One fund clearly was cheaper than the rest and should have been the only one the students selected. In the index-fund experiment, one group of the test-takers listed fees as a mere eighth out of 11 factors to consider when choosing a fund.
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