Fund managers rarely outperform the market, so why invest in them?
By: Julio Cacho, PhD
In short, you shouldn't. The odds are incredibly stacked against you.
No one wants to lose hard-earned money. What if I told you that many people are doing just that by investing dollars into stock market funds that are actively managed by people? You’d think if a qualified professional was actively picking the best stocks that can grow your money - every day! - you’d make more money over time, right? WRONG! Please don’t make this mistake! Research shows that you will lose out on money over time by investing this way.
The article "Fund managers rarely outperform the market for long", from The Economist, (click here) advocates for passive index market funds over actively managed funds. Passive funds are not managed, and they track a benchmark like the S&P 500. Over time, passive funds are shown to outperform managed funds. Why? Because investors have access to the same information and fierce competition, making the stock market extremely efficient. Passive indexing cost significantly less AND outperform managed funds long term – I know which fund I’d invest in!
If you find an actively managed fund that is performing better than a passive fund, there’s an old saying that states: “past performance is no guide to the future”. Don’t rely on the past performance of a managed fund when investing new money. Each active fund manager has a unique “style” for what type of stocks they invest in. Like fashion, styles change often. Also, that manager only runs a portfolio for an average of four-and-a-half years. Why invest your money in a fund based on past performance when going forward everything about the fund will change?
If you were building a soccer team today, chances are you would pick Cristiano Ronaldo or Lionel Messi to be on your team. But would you pay them for past value, or for present and future value? You’d pay them what they are worth now and in the future. If you want to make the most money over time, be active in moving your money into a passive index fund.
Don’t believe me? Read this Economist article to learn more about why passive funds are the right choice for you!