Why 'they' won't beat the market for you...
There is another mug's game out there, and it's called mutual fund investing. We don't believe that individuals who have the time and discipline to do their own research should invest in the majority of Mutual, Pension or Hedge Funds at all if they can help it. This is for the following key reasons:
- It has been shown1 that 75% of investment funds under-perform the stock market index over the long term due to the compounding impact of high fees and trading commissions - you are better off owning a tracker fund!
- The average investor in a fund radically under-performs the fund's reported returns as they tend to invest in funds based on past returns which often revert to the mean. In fact, a recent study2 showed that "when managers were compelled to invest extra cash from investor inflows in stocks, they were unable to beat the market."
- Fund Managers typically get rich on fees rather than from making good investments. Indeed, if the market stood still, the 2% you may pay each year as fees will halve your portfolio over 30 years! As Fred Schwed wrote back in the 1940s, where are the customers' yachts3?
- Fund Managers' careers may be at risk if they don't report consistent quarterly results. This leads to short termism, 'herd' behaviour and the chasing of momentum stocks which often ends catastrophically.
- Institutions are often too big to invest meaningfully in smaller growth companies which much research has shown may offer the best opportunities.
Essentially, the fund management industry shows evidence of institutionally bad decision making, herd behaviour and excessive compensation.4 If investors are looking for long term security, then they should take matters into their own hands by learning to invest their portfolio themselves.
If you can't find the time and discipline to dedicate to stock market investment, we still recommend investing in the stock market, but you should focus on the very lowest cost passively managed funds. Index funds are the best bet and beat 75% of actively managed funds.
First Quadrant, "The Management and Mismanagement of Taxable Assets" ↩
Gordon J. Alexander, "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds" ↩