In science, it's easier to disprove a universal hypothesis. You only need to find one counter-example to bust the entire hypothesis. You might hypothesize, “Man-made industrial era carbon emissions are solely responsible for causing global warming.” That is a universal hypothesis because, by identifying a single warming period that occurred prior to industrialization (e.g., the Medieval Warm Period), you can disprove this universal hypothesis.

You might say, “Why not add appropriate hedging language to make it harder to disprove the hypothesis?” A non-universal hypothesis might be: “High carbon levels in the atmosphere may increase global warming.” This wording makes it more difficult to disprove the hypothesis. You can find a period where high carbon levels exist during an Ice Age era (some research suggest this may have been the case), but that does not disprove the hypothesis (since the hypothesis contains the word “may”). In addition, the hypothesis contains no baseline to reference any increase. Failing to see an increase may not disprove the hypothesis because temperatures may have actually been lower if carbon content would have been lower.

This represents a hypothesis that's virtually impossible to disprove. You might think this is an ideal hypothesis, but then you will have exited the realm of science and entered the world of politics. In science, the only purpose of creating a hypothesis is to discover a theory, i.e., a universal truth. To discover a universal truth, you need a universal hypothesis. Any lesser hypothesis has no value in science or truth, telling you a lot about politics.

Which brings us to mutual fund expense ratios. There's a popular meme which implies you're better off picking a fund with a low expense ratio. This is generally followed by a meme that concludes, because index funds have low expense ratios, you should only invest in index funds. If you convert either of these memes into a universal hypothesis, it's incredibly easy to disprove them. Let's do that.

In the first case, the universal hypothesis would maintain that, “Low expense ratio funds will always perform better than higher expense ratio funds.” We only need to find a single example of a higher expense ratio fund performing better than a low expense ratio fund to thwart this hypothesis. In looking at the 15 year return data for the Morningstar database ending December 31, 2014, five out of the top 10 performing funds had an expense ratio above the average. In all, 25 funds with an above average expense ratio had above average returns. Hypothesis denied.

In the second case, we need only find a single case where an active fund with a higher expense ratio active fund outperforms an index fund with a low expense ratio. The same Morningstar database shows 95 of these actively managed funds beat the best performing (and lowest expense ratio) S&P 500 index fund for that period. Hypothesis denied.

A salesman can sometimes get away with using disproved hypotheses. A scientist can't. So, is a fiduciary more like a salesman or a scientist?

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).