Searching for superior investment fund managers is a waste of your money and time
A previous article, “The Solution – ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you to keep focused and on track throughout your life. This follow-up article discusses the reasons why selecting mutual funds and ETFs based on the characteristics of fund managers is a waste of your valuable time and money.
You cannot reliably identify beforehand professional investment managers who will deliver superior performance at a reasonable price in the future. You cannot hire them at a price that is lower than their potential value-added.
Superior past investment fund performance DOES NOT predict superior future investment performance. Nobody has proven that there is ANY reliable way to identify beforehand which managers will have superior future performance. If you cannot predict better future performance based on past results, how could you predict them based on manager characteristics? Paying attention to managers of funds is just a useless financial celebrity sideshow, which is focused on the past and not the future. Do not waste your time and money. (See: Distinguishing between true investment skill and luck)
Investing is not a matter of being smarter. A huge number of very smart professional and amateur investors play the global securities markets constantly. In aggregate, all investors set market values, and their competition makes relative skill largely unimportant in the long-term. Higher skill negates higher skill in auction markets, when the whole world is watching and playing. Those who seemingly have had superior performance in the past predominantly were just lucky – no matter how they might score on an IQ test or how much education they may have. (See: Chance creates the illusion that investors can beat the stock market and How stable have Morningstar Ratings for mutual funds been over time?)
However, professional investment portfolio managers tend to do somewhat better than amateur portfolio managers do. The scientific investment literature indicates that, generally, this is probably not because professionals are more intelligent or significantly better than amateurs are at predicting future values related to the securities they select. It seems instead to be more a matter of error control. Individual investors tend to perpetuate their investment management errors, while professionals seem to correct errors more quickly and systematically.
Securities professionals usually are well educated and experienced. They work full-time in groups using globally networked real-time information and many have automated analytic applications. Generally, they have a significant edge over amateur investors. While professional competence can vary rather widely, the experience, competence, and profit motive within professional organizations tends to correct errors rather than to perpetuate them. (See: The illusion of superior professional investment manager performance)
Unfortunately, amateurs cannot exploit this rather narrow performance differential of professionals over amateurs. Beforehand, you cannot reliably identify professionals who will turn out to be better in the future using any method that is associated with the characteristics of the managers themselves. Professionals’ education, years of experience, time in a position, and other personal attributes have not been demonstrated to predict performance. Paying attention to the background of investment manager is just a waste of your valuable time.
All that matters is the investment result of the portfolio managed by any professional, and the only reliable predictive variable tends to be investment management costs. When professional management costs are higher, then their net returns tend to be lower and vice versa.
Because you cannot reliably predict which investment professionals will have superior performance in the future and because you cannot hire active professionals at a cost that is lower than their value-added, the only solution is to sidestep the game. When you buy only low-cost, passively managed index funds and ETFs, you do not have to play the futile and time consuming “pick a superior manager” game. (See: Scientific mutual fund and ETF screening criteria — a summary and The Solution – Only follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient)
Tags: investment managers
Personal Financial Planning
- Early Retirement for Renters through Investment Cost Reductions (Early retirement for renters due to investment cost improvements and higher savings rates
Improving on Fran and Fred's lifetime financial plan with earlier retirement
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their [...])
- Be Wary of New Investment Asset Classes (
Hear ye, Hear Ye, individual investors: Be wary of new investment asset classes - A Tip from The Skilled Investor
Many promoters in the financial services industry have shown a strong proclivity in recent years to invent and to market supposedly "new" investment asset classes. Industry advocates will claim that these new asset classes deserve some [...])
- The Quality and Cost of Advice Paid by Investment Sales Loads – Part 2 (
Can you really get free and objective investment advice, when you pay investment sales loads? (Part 2 of 2)
Excessive investment costs and investment expenses are a plague on your lifetime personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you [...])
- The Kind of Financial Advisor You Need (
The kind of financial advisor you need - A Tip from The Skilled Investor
Good or bad, financial advisors are expensive. If you need a financial advisor's help and you carefully select a good financial advisor, the value of the personal finance and investment advice that you receive might easily repay the advisor cost. However, bad [...])
- Conclusion to: What Is a Well-Diversified Investment Portfolio? (<<-- Continued from Part 1
In addition to showing that large numbers of additional stocks are required to achieve measurable improvements in diversification, the Evans and Archer study clarified other requirements for a well-diversified portfolio. The number of stocks selected for a highly diversified portfolio also depends on what one actually means by "the market."
To achieve [...])
- Diversify fully within asset classes – Step 4 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management.
Diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Management expenses, sales loads, and trading cost factors (
Fund Authority Scores range from -10 to +10 and measure five factors for diversified stock or equity investment funds: 1) annualized management and sales expenses, 2) trading costs, 3) historical performance, 4) fund maturity, and 5) operating efficiency.
Go to Part 2 -->>
This article explains how Fund Authority Scores rate stock or equity mutual funds and [...])
- The Biggest Personal Finance Story of the Past 30 Years – Part 3 (< <-- Go to Part 2
The Biggest Personal Finance Story of the Past 30 Years - Part 3
There is no reason to believe that industry self-regulation or governmental regulation will ever fix these problems. Only those individuals who become wise enough to be proactive and seek out lower cost financial products will stop getting fleeced. [...])
- Day Trading Is a Terrible Idea (Why Day Trading Is a Terrible Idea
Investing success is built upon the idea of buying an asset at a discounted price, and then holding it for a long period of time as the value of the asset steadily rises due to the expected risk premium inherent in holding your capital in a risky asset. [...])
- How Many Mutual Funds are Needed for a Well-Diversified Portfolio? – Evidence (Actively-managed mutual funds are not created equally. Performance can vary significantly - even when funds pursue similar strategies or "styles."
This article addresses the impact on portfolio diversification of holding more than one actively-managed mutual fund. (For the companion article to this, see: How many mutual funds are needed for a well-diversified portfolio? – a commentary)
- Commodity Futures in Your Investment Portfolio (Commodity futures in your investment portfolio - Is there really any future for individual investors?
The Skilled Investor's previous article, "Be wary of the new investment asset classes," voiced skepticism about many supposedly new asset classes. This article delves into the financial science behind this skepticism, as it relates to one of these supposedly new asset [...])
- Retirement Savings Needs of Renters Without Financial Planning Improvements (Retirement savings needs of renters prior to any financial planning improvements
Starting to plan with a non-optimal baseline projection
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their lifetime finances and retirement security. [...])
- Taking the Snake Oil Out of Mutual Fund Evaluation (Superior mutual fund and ETF performance charts are the sales tools of modern financial snake oil salesmen
Historical performance charts allow investment fund promoters to market selectively their supposedly superior funds and to allege that their excessively high fees are worth it. Lured in by superior past performance, most often individual investors will get mediocre future [...])
- American Funds – Capital Income Builder Fund – Class A Shares (CAIBX) attain a +4 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- What Is Investment Portfolio Diversification? (From the perspective of holding a well-diversified investment portfolio according to scientific investment principles, the objective of diversification is to minimize or eliminate ‘unsystematic risk’ or those risks that are not related to the price volatility of the overall securities markets.
When people speak of investment diversification, they may mean different things. Therefore, clear definitions are [...])