As you might expect, there are many ways to invest poorly. Many people tell you to find a professional stock fund manager to get the best returns.
- Is this true?
- How good are they?
- How do I pick a good one?
- How much does it cost?
Is this true?
How good are they?
The average mutual fund manager fails to match, much less beat the index fund. The average professional is worse than just flipping a coin.
How do I pick a good one?
There’s also no way to pick out the good fund managers; last year’s mutual fund genius is, more often than not, this year’s klutz.
These stock picking experts are almost always sincere, but history doesn’t back them up.
We can keep searching for successful stock picking experts, but we’ll probably find Bigfoot, the Yeti, and the Loch Ness Monster first.
How much does it cost?
Active management costs you in a number of ways:
- Expenses: The average actively managed stock fund in 2014 had a .86% expense ratio vs. .11% for index funds. That’s right, you can pay more for worse results.
- Market timing: professional managers try to time the market, usually unsuccessfully.
- Taxes: there’s faster turnover, meaning your gains get taxed at a higher rate.
- Cash positions: Cash has a very low return, dragging down your returns. Cash is needed, but you can hold that in your bank or credit union better.
- Desperation: With the difficulty of competing with mutual funds, managers are tempted to make bold (unwise) moves.
Conclusion:
Buy low cost index funds. They’re cheaper, better, simpler, tax efficient, and stabler.
