What Fund Managers are on your side?
- The expensive ones?
- Those with a great record?
- The cheap ones?
The stakes are high, so it’s important to get this right.
The good news is that they’re all on your side–kind of. While it would be hard to find a major mutual fund manager that wasn’t trying to make you money, sincerity doesn’t always equal results. Worse yet, in some cases the fund manager has perverse incentives, that lead him to unproductive behavior.
- Expensive Ones – No, the extra expense comes out of your pocket, but the performance isn’t there to back it up.
- Great Record – No, active managers in one time period are less likely to succeed the next time._
- Cheap – Yes! The best predictor of a good return is having low expenses.
Why does it work this way? Because nobody knows the future, so paying for an “expert” is a waste of money and paying for past “success” is less than pointless. An “expert” stock picker can’t afford to go out on a limb, so he will stay with his peers. Mutual fund families strike out in many arbitrary directions and merge losing funds into winning funds to make it look like they know what they’re doing. Only the guy who keeps your cost low is a good choice.
