Survivorship Bias

Survivorship bias is simply the inflation in apparent returns due to the fact that some investments fail utterly and disappear from the record. For individual stockpicking investors this obviously damages their actual returns but when we look at the records of indices and funds these failures simply don’t appear. This causes their apparent returns to be biased upwards.

Survivorship bias applies at all levels in investment. At the most extreme level the returns quoted on stockmarkets across the 20th century only really cover those first world nations lucky enough to have traversed the century without a total breakdown in their economies. Investors in pre-Leninist Russia or pre-Peronist Argentina wouldn’t recognise the figures we idly bandy about here.

Similarly investment returns quoted for specific stockmarkets generally ignore the disappearance of individual stocks. Investing in index trackers neatly gets around this problem, since survivorship bias is built into the returns (the index is the index, after all). Individual stock pickers, however, need their survivors to outperform average market returns in order to even equal the indexes.

Mutual funds, however, are portfolios of stocks. They don’t go bust or get taken over by mad populist politicians or frenzied anti-capitalist philosophers with a point to prove. How in the world do such things get to exhibit survivorship bias?
http://www.psyfitec.com/2009/04/survivorship-bias-in-magical-mutual.html