Financial Professionals - What Do They Know?

bigfreddiel

Its a well known fact that fund managers rarely beat the market - tracker funds do better that any managed fund. Don't believe me then read this:

"But the odds of finding a fund manager who will consistently beat the market are stacked against investors. Even Warren Buffett, the world's most famous investor and stockpicker admitted earlier this year that a 'very low cost index fund is going to beat a majority of the amateur managed or professionally managed money'....

Read more: http://www.metro.co.uk/money/60562-active-fund-managers-failing-investors#ixzz1lpFal1pI

So there we have it fund managers decisions are more luck than judgement.

Now this has confirmed what Ithought all along IFAs are no different - what exactly do they know better than us in picking investments? Not much other than wrapping it up in finance speak to make it sound good - when I questioned one a bit more closely on his advice and how he would help he couldn't answer some very basic questions. In fact he got quite angry and offhand during my interview process.

As we all know its a closed shop where the finance bods get fat on our account - thats why they have access to products we don't

just a thought....

fj

dunstonh

Even Warren Buffett, the world's most famous investor and stockpicker admitted earlier this year that a 'very low cost index fund is going to beat a majority of the amateur managed or professionally managed money'....

Yet Warren Buffett himself invests on the basis of value. So, he is doing one thing but telling others to do different. Also, his comments are for the US market where trackers make much more sense.

Now this has confirmed what Ithought all along IFAs are no different - what exactly do they know better than us in picking investments?

Depends on what you know.

In fact he got quite angry and offhand during my interview process.

You are not exactly the most balanced person to have a conversation with on here. So, if you are like that in real life you could understand it.

Glen_Clark

dunstonh wrote: »

Yet Warren Buffett himself invests on the basis of value. So, he is doing one thing but telling others to do different.

I cannot see any similarity between what Warren Buffett said, and your interpretation of what he said.

dunstonh

Glen_Clark wrote: »

I cannot see any similarity between what Warren Buffett said, and your interpretation of what he said.

Read it again then.

I largely disregarded the article as it contained a number of factual errors.

LeoC

I once did a study on fund manager returns and compared them to buy-and-hold strategies using the FTSE. While in the short term some funds will beat the index (and some will underperform), over a long enough period of time, only 2 funds managed to beat the FTSE. So my suggestion is always to invest on an index.

A Financial Professional could help you decide which index is best, and the cheapest way to buy into that index??

Another thing to keep in mind regarding funds is the "survivorship bias" effect. This means that the funds you are looking into today (and their returns) are only the funds that survived. The really bad funds that went under or closed, you don't see their data. So for every fund that looks good, assume there's a handful of bad funds you can't see because they don't exist any more.

Funds also tend to do tricky things to improve their image. For example, fund managers create hundreds of "seeding funds" which they run with minimal capital (their own, no client funds) testing new investment techniques over a couple of years. The bad ones, they kill. The good performing ones they open to clients and suddenly these funds already start with 2 years of good track history.

Just a few thoughts. I used to work at an asset manager so it's not that I think it's all bad, but you have to know what you're getting yourself into. If it were my money, I'd put it into a low-cost tracker fund.

IronWolf

Warren Buffetts advice is to invest in index funds if you aren't willing to put in the time and effort into investing properly.

He isn't against active management absolutely, as he has hired various investment managers and advised pension funds on which managers to hire to pick stocks. But all follow a similar "value investment" strategy which gives an edge.

On average though, funds wont beat the market, because they don't invest on the same principles as he does. And most of the shares nowadays are held by funds, so on average its hardly possible for them to beat the market.

For the majority of the public, investing in index funds is the way forward, because they are too inexperienced to recognise the best managers with sound strategies. In a way, you need to be good at picking stocks yourself in order to recognise which managers are good at picking stocks. The twist is that if you could do that you wouldnt even need a fund manager.


There are exceptions though, in mature markets index may be best, but for emerging economies there are a lot of issues which an active manager can avoid, a tracker can't, such as corruption, government intervention, corporate fraud. I myself bought an active managed fund to invest in emerging markets, but choose my own stocks in the UK & US.

psychic_teabag

LeoC wrote: »

I once did a study on fund manager returns and compared them to buy-and-hold strategies using the FTSE. While in the short term some funds will beat the index (and some will underperform), over a long enough period of time, only 2 funds managed to beat the FTSE.

I used to work at an asset manager ...

Is that study (raw data and analysis) available anywhere, or was it internal to the asset manager company ?

There are lots of arguments about this (here and elsewhere) but it always seems to be in the abstract ("there are studies that show ...") and ("those studies are no good because..."). Would be nice to have an actual study in the public domain somewhere so that everyone can see the actual details and fight over them in a more constructive way. (Fix problems, extend and update, etc.)

I guess a problem is avoiding copyright problems on data sources.

Richie(UK)

When somebody suggested to the golfer Arnold Palmer that his success had been down to luck he replied "It's funny, the more I practice, the luckier I get." (That may not be the exact quote but it's along those lines).

I suspect the same applies in the world of finance. Those who spend a lot of time dealing with such things will, all other things being the same, be more skilled than those who spend little or no time. There is, of course, no guarantee that they will get it right every time but the odds are in their favour.

Therefore, I think it makes perfect sense for Warren Buffet to invest in the way that he does. For those of us with more limited experience (if we are prepared to admit to our limits) it makes sense to take a different approach. This approach, to my mind, essentially comes down to tracking the market as a whole (beating many funds but being eclipsed by some) or seeking out the advice of somebody that has more experience (such as an IFA) and is more likely to be able to select the funds that will eclipse the market as a whole - or, perhaps, a mixture of the two. Nobody gets it right all the time, be it Warren Buffet, Mr(s) XYZ at fund ABC, or your preferred IFA - that's why we don't (shouldn't!) put all of our investment eggs in one basket.

tldr: If you are happy with market average returns (and there is nothing wrong with that) then trackers are ideal. If you want to try for above average returns then you have to accept that there is (more) risk involved in this approach and that you may be better served by seeking the advice of those with more experience.

Glen_Clark

dunstonh wrote: »

Read it again then.

I largely disregarded the article as it contained a number of factual errors.

OK - but it still says the same as it did last time I read it.
Are you going to enlighten us as to these 'factual errors'?

JonnyBravo

Richie(UK) wrote: »

When somebody suggested to the golfer Arnold Palmer that his success had been down to luck he replied "It's funny, the more I practice, the luckier I get." (That may not be the exact quote but it's along those lines).

Yeah, not quite an exact quote.
But Gary Player said something similar.

Ark_Welder

LeoC wrote: »

I once did a study on fund manager returns and compared them to buy-and-hold strategies using the FTSE. While in the short term some funds will beat the index (and some will underperform), over a long enough period of time, only 2 funds managed to beat the FTSE. So my suggestion is always to invest on an index.

A Financial Professional could help you decide which index is best, and the cheapest way to buy into that index??

Another thing to keep in mind regarding funds is the "survivorship bias" effect. This means that the funds you are looking into today (and their returns) are only the funds that survived. The really bad funds that went under or closed, you don't see their data. So for every fund that looks good, assume there's a handful of bad funds you can't see because they don't exist any more.

Funds also tend to do tricky things to improve their image. For example, fund managers create hundreds of "seeding funds" which they run with minimal capital (their own, no client funds) testing new investment techniques over a couple of years. The bad ones, they kill. The good performing ones they open to clients and suddenly these funds already start with 2 years of good track history.

Just a few thoughts. I used to work at an asset manager so it's not that I think it's all bad, but you have to know what you're getting yourself into. If it were my money, I'd put it into a low-cost tracker fund.

Survivorship bias also applies to individual companies and to most indices. Bad companies fail or are taken over. Good companies are taken over, with benefits accruing to management as much as shareholders - and frequently to the detriment of the acquirer company. And failing companies fall out of an index to be replaced by the more successful ones: the FTSE100 is an example of that.

The UK's oldest continuous index, the FT30, was launched in 1935. Unlike the FTSE indices, its constituents change only when one fails or is taken over. Since launch, there are only two companies that remain in this index.

http://www.ft.com/cms/759ac604-a4ca-11dc-a93b-0000779fd2ac.html