Any effort expended trying to find the next great fund manager is effort wasted. To success in investing for your long term goals you must own equities…globally diversify…rebalance.
Even if you were fortunate enough to locate this needle in the mutual fund haystack, how confident can you be that his stellar performance will persist? Studies of mutual fund performance demonstrate little persistence by those anointed as investment stars based on their past performance. Burton Malkiel noted, in his seminal book, A Random Walk Down Wall Street, “It does not appear that one can fashion a dependable strategy of generating excess returnsbased on a belief that long-run mutual fund returns are persistent.”The next time your broker tells you to buy a mutual fund he is recommending, ask him these questions:
1. Why are you able to identify just a couple of managers who you believe have genuine investment skill out of the thousands out there?
2. If you are basing your recommendation on their past performance, doesn’t the SEC require disclosure that past performance is no guarantee of future results?
3. Did any of your clients actually capture the returns you are touting?
4. How many years of data did you look at before you concluded the fund manager has genuine investment skill?
The answers to these questions will quickly expose the folly of the exercise of trying to identify in advance fund managers with legitimate investment skill.
As noted by Nobel Laureate Paul Samuelson, in Challenge to Judgment, 1974, dismissing those who believe they can find managers with this skill: “They always claim that they know a man, a bank, or a fund that does do better. Alas, anecdotes are not science. And once Wharton School dissertations seek to quantify the performers, these have a tendency to evaporate into thin air–or, at least, into statistically insignificant t-statistics.”
There is additional evidence that 60 years of data are required to determine if a fund managers results are a result of sill or luck.
Please comment or call to discuss how this affects you.
- The Derivative Scare: Fear Mutual Funds, not ETFs – ETF Guide (401kplanadvisors.com)
- What MF Global Can Teach You About Investing (401kplanadvisors.com)