COUNTERCOLUMN: All Your Bias Are Belong to Us

The Fidelity Destiny series of funds made a list of "four-alarm funds" published by fundalarm.com on July 1st.

A four alarm fund, according to fundalarm.com, is a fund which has underperformed its benchmark index for the last 1 year, 3 year, 5 year, and 10 year time periods.

The Fidelity Destiny funds were aggressively marketed to military personnel by First Command Financial Planning, which charged novice military investors front-end sales charges of up to 50% - nearly ten times the industry average for sales loads - for putting them in these funds.

Fidelity Destiny I - a large-cap fund which achieved the dubious distinction of trailing the S&P 500 for nine calendar years running - the statistical equivalent of flipping "tails" nine times in a row" controls more than $3 billion dollars in military families' assets. Its fund manager, Karen Firestone, was replaced as fund manager last May.

(See the Morningstar.com review from Greg Carlson here: http://quicktake.morningstar.com/Fund/MorningstarAnalysis.asp?Country=USA&Symbol=FDTOX )

Fidelity doesn't even get to use high fees as an excuse for its underperformance: the 0.47 percent expense ratio on A shares is actually quite reasonable, and compares favorably with other actively managed funds of its class.

It's not that Firestone was a bad manager - she's a reasonably competent growth-oriented manager, and has actually beaten other large growth style fund managers during her tenure there. It's just that being a growth manager in the markets of the last five years has been the equivalent of taking a knife to a gun fight. She was doomed from the start. It wasn't a manager problem so much as a manager selection problem.

(Incidentally, check out the hilarious progression of Morningstar analysts' opinions going back to 2001 here: http://quicktake.morningstar.com/Fund/AnalysisArchiveList.asp?Country=USA&Symbol=FDTOX )

Fidelity Destiny II, incidentally, has squandered even more military family money - with assets of more than $5 billion dollars languishing in a consistently underperforming fund for the last decade.

Moreover, the machine gun trading strategy that the fund employs under its current manager is highly tax-inefficient, generating capital gains distributions and taxes and further depressing returns for anyone holding the fund outside of a retirement account. All in all, an inappropriate core holding for a military family new to investing.

All told, the two Destiny funds hold over $8 billion dollars in military family money, and each has managed to lag a simple S&P 500 Index fund in a variety of markets.

So what's a military family to do?

Why, I'd look no further than Vanguard's Target retirement funds - a great "one shot, one kill" option for people who want to focus more on beating the Muj than on beating the markets.

Just pick out whichever fund is closest to the date you plan on leaving the workforce, set up an automatic investment program with Vanguard for as much as you can (333.33/month at a minimum, if possible, since that will max out your Roth IRA or traditional IRA allowable contribution) and go down range and kill the enemy. Keep it up for 20 -30 years. You should do ok. In fact, you'll probably do better than about 75 percent of all investors.

Splash, out

Jason