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, [...]