Fidelity Magellan and the Power of Inertia

Last Updated Apr 25, 2011 9:35 AM EDT

Albert Einstein called compounding the most powerful force in the Universe. I'd like to nominate Sir Isaac Newton's power of inertia as the second most powerful force. The Fidelity Magellan (FMAGX) mutual fund offers the perfect illustration of Newton's theory that an object at rest tends to stay at rest. More importantly, I'll show you how you might overcome this force to boost your returns.

Fidelity Magellan
The Fidelity Magellan fund was launched in 1963. It was Peter Lynch who took the fund from $20 million in assets in 1977, to $13 billion when he left in 1990, returning an average of 29 percent annually. That translates to a $100,000 investment being worth more than $2.7 million at the end of that 13 year period.

Since the glory days of the 70's and 80's, Magellan has mostly been a dog. Morningstar gives the Magellan fund its lowest one star rating, noting:
  • Magellan has underperformed its peer group mutual funds over the past 1, 3, 5, 10, and 15-year periods.
  • Magellan has been riskier than its peer group over the ten year period examined.
Remembering that most mutual funds are riskier and return less than the market, it's quite a feat that Magellan could be so much worse than their pretty dismal competitors. Yet they have been.

Fidelity Magellan Today
Most mutual funds with such a track record of underperformance would have gone out of business or been merged with another fund. Today, however, Fidelity Magellan has $22.9 billion in assets making it the 28th largest US stock mutual fund, according to Morningstar.

It's not my intention to heap abuse upon Magellan. In fact, with a 0.74 percent expense ratio, I'd buy it before I'd buy 80 percent of the other mutual funds. I'm merely pointing out that inertia has probably caused a lot of people to continue to leave their money in this fund despite its underperformance year after year. Thinking back on the fund's glory years makes it easier for investors to take the path of least resistance and do nothing.

How to harness the power of inertia
Much like compounding, inertia can either be helping or hurting you. If you have funds that have done poorly, don't let doing nothing be your fall-back plan. Calculate how much the underperformance has cost you and translate that information into something you could have spent that lost money on. Like how many times you could have filled up your tank with gasoline. For many, a change can be the equivalent of free gasoline every year!

Moving to low cost index funds allows you to channel the powers of both compounding and inertia to the greater good, your good. And if you can't do disciplined rebalancing, a low-cost target date retirement fund can harness both powers as well.

It's your choice as to whether compounding and inertia are working for you or against you. You can either . . .
  • Harness the powers of compounding and inertia with low costs and the ability to stay the course, or you can . . .
  • Accept the tyrannies of compounding and inertia.
Hopefully the option you pick for your nest egg has them working for you. I think it's an easy choice.

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  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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