Whether picking between funds, working with a fee-only investment advisor in Austin or preparing for an international trip, pricing matters. Active investment management typically involves higher fees and trading costs with a portfolio manager trying to outperform the market. It’s easy to doubt the value of active investment management strategies when considering performance and survivorship of mutual funds. If there was an ability to identify mistakes and exploit mispriced securities, active investment management must be able to outperform their management fee and trading costs to outperform the market.
2. Outguessing the Market – Don’t Try It!
Many fund managers believe they can identify “mispriced” securities and convert that knowledge into higher returns. But fair market pricing works against such efforts, as indicated by the large proportion of mutual funds that have underperformed their Morningstar category index.
In this chart, the gray bars represent the number of US-domiciled equity and fixed income funds in operation during the past 15 years. These funds compose the beginning universe of that period. The dark gray areas show the percentage of equity and fixed income funds that survived the 15-year period. The blue and green bars show the smaller percentage of equity and fixed income funds that survived and outperformed their respective Morningstar category index during the period.
Our research shows that over both short and long time horizons, the deck is stacked against mutual funds that attempt to outguess the market.
This is part two of a ten part series in pursuing a better investment experience.
Part One: Embrace Market Pricing
Part Three: Resist Chasing Past Performance
Part Four: Let Markets Work for You
Part Five: Consider the Drivers of Expected Returns
Part Six: Practice Smart Diversification
Part Seven: Marketing Timing – Avoid It!
Part Eight: Separate Emotions From Investing
Part Nine: Look Beyond Investment Headlines
Part Ten: Control Your Investment Focus
The Balance: Warren Buffett’s Advice on Picking Stocks
Fee-Only Investment Advisor Austin
Still have questions in how to pursue a better financial planning and investment experience? Meet with a fee-only investment advisor in Austin, TX or online.