According to The Wall Street Journal, the CGM Focus Fund was the best performing mutual fund in the last decade. In a time when the Standard and Poor's 500 lost money, the CGM Focus Fund turned in a stellar return, averaging 18% per year. So why did most of the fund's shareholders lose money?

The problem is a matter of timing. The fund produced an amazing return of 80% in 2007. The financial media went wild. Fortune magazine called fund manager Ken Heebner America's hottest investor . His picture adorned the cover of Kiplinger's Personnel Finance magazine. Investor's Business Daily crowed about the fund's stellar performance as well. Yet, The Wall Street Journal said the fund sucked in almost three billion dollars in new assets in 2008, but then proceeded to produce a disastrous return, losing nearly half its value.

Page 72 of The Naked Portfolio Manager talks about the difference between time-weighted returns and dollar-weighted returns. When a fund is as volatile as the CFM Fund is, it can produce eye-popping, time-weighted returns in excess of 18% per year while still losing money for its average shareholder.

This is yet another example of the availability error discussed on pages 38 and 39 of The Naked Portfolio Manager. My new e-book, available for download now, discusses an allocation strategy that might prove helpful if you're thinking about investing in funds that have this type of volatility.

Labels: CGM Focus, Fortune Magazine, Kiplingers