SMART INVESTOR: There's No Point In Trying To Pick A Winning Fund Manager

trophy, prize, winning

In the realm of investment advice, no question gets people more riled up than this:

What’s the best way to beat the market?

There are two kinds of answers –– those from people who believe individual investors actually can beat the market (and have any business trying), and those from people who find the notion downright ridiculous. 

In a recent tete-a-tete, wealth manager and author Daniel Solin takes on Investopedia’s Michale Schmidt, who recently wrote a post purporting to help investors “choose a fund with a winning manager” in order to better their odds at beating the market.

“There is a reason why those who write about picking “winning” mutual funds are long on rhetoric and short on data,” Solin writes. “There is no credible evidence anyone has the ability to engage in this exercise successfully.”

In his takedown, Solin highlights a study by investment management firm First Quadrant, in which the authors found the average actively managed fund underperformed its benchmark by a 4.17% after taxes over a 10-year period. Only 9% of the funds beat their benchmark after taxes, and of that pool, they won just 1.79% of the time. 

The benchmark they sought to beat? The Vanguard 500 Index Fund, a low-cost fund that is easily accessible to most individual investors. 

That backs up the claim in a recent white paper by Portfolio Solutions and Betterment, “The Case For Index Fund Portfolios,” which also found that they can rarely be beaten.

Looking at advanced portfolios holding 10 asset classes between 1997 and 2012, researchers found index fund portfolios outperformed comparable actively managed portfolios a staggering 82% to 90% of the time. And the longer investors held those investments, the better shot they had at outperforming active funds over time. 

Here’s the bottom line, as Solin puts it: “The game of trying to pick outperforming fund managers is not worthy of your time or effort. You are unlikely to succeed. Instead, you should focus on your asset allocation, invest in a globally diversified portfolio of low management fee index funds and focus on factors you can control, such as diversification, fees, costs and taxes.” 

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