This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.Everyone understands that coin flipping is random. You can flip five heads or tails in a row and no one would believe that you are an "expert" coin flipper.
What about fund managers who have five years of stellar performance? You see the ads every Sunday hyping their superior returns.
A closer look at the data indicates that these managers are no more skilled than the lucky coin flipper.
One study looked at the performance of the top 100 fund managers over an eleven year period. Only 14% of them were able to repeat their performance in the following year.
There are many studies demonstrating that there is no reliable way to predict the performance of fund managers. This is why you always see the disclaimer that "past performance is no guarantee of future results" in advertisements for mutual funds. It's put in small type so that you won't pay much attention to it.
Here are a couple of examples (there are hundreds more):
The iShares Austria index fund was #1 in 2004. It was #250 in 2005.
The Pro Funds Ultra Mobile fund was #2 in 2004. It was #1402 in 2005 and #6250 in 2006.
Here's the bottom line:
When actively managed funds (i.e. funds that attempt to beat their benchmarks) do well, it is most likely due to luck and not skill.
Before you entrust your hard earned money to a fund manager who professes to be able to "beat the markets," you need to understand the difference between random chance and provable expertise.
Rich people do.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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Reader Comments (Page 1 of 1)
12-02-2008 @ 8:47PM
phyllis sherman said...
WHAT DOES ANYONE THINK OF SMITH BARNEY AS INVESTMENT BROKERS?
12-02-2008 @ 10:39PM
Sam said...
Funny thing.... I lost a bunch of money in stocks until July 08.
Since then however - I have made up for all the loss - trading in just 2 ETFs SSO and to a much lesser extent SDS
In this volatile market why should you risk anything other than an index fund - when you can get amazing returns within a day.
-Sam
http://tickertoday.blogspot.com