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Investing in Actively-Managed Funds

  1. Outperforming the market by picking stocks and/or market timing is rather difficult.
  2. Less than 50% of actively-managed funds will beat a low-cost index fund.

So it seems to me that investing in an actively-managed fund is the rough equivalent of saying, “I don’t have an above-average ability to pick stocks, but surely I can do an above-average job at picking an actively-managed fund!”

Many investors–myself included for a few years–don’t seem to pick up on the fact that selecting an actively-managed fund must not be as easy as it looks–i.e., simply choosing a fund with great past performance.

If it were that easy, then everybody (including other fund managers) would already be doing it. And if that were to happen, then by definition the original outperforming fund could no longer be an above-average performer.

Takeaway: Just like with picking individual stocks, beating the market by picking actively-managed funds requires that you either:

  1. Get lucky, or
  2. Know something that the market doesn’t.

And I assure you, a fund’s past performance is never unknown to the rest of the market.

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Comments

  1. I’m not a huge fan of actively managed funds. They don’t do much (if any) better than other funds, and they often cost more.

  2. “I don’t have an above-average ability to pick stocks, but surely I can do an above-average job at picking an actively-managed fund!”

    I had to stop and think about that statement for a minute. That’s a great way of looking at the situation. The same can be said about the fund’s manager too!

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