Are fund managers worth it?

6 steps to successful investing: #2 Beware of market gurus

Switch on the financial news, or open the money section of any newspaper, and you'll find no shortage of supposed experts telling investors what to do. Yet the track record of these market gurus is dismal. Year after year their forecasts prove inaccurate, and only rarely are they held to account for failing to predict the future. Being wary of them is the second step in the Six Steps to Successful Investing series.

In this video, you'll learn why so-called "star" fund managers are far less reliable than they appear, and whether fund managers are really worth what they charge. Research has consistently shown that only around 1% of fund managers beat the market consistently over the long term, and they're almost impossible to identify in advance. In fact, it takes roughly 22 years of data to be 90% certain that a manager's outperformance is genuinely down to skill rather than luck. Worse still, even those few who do outperform tend to recoup any value they add through their fees, leaving little or nothing for the investor.

You'll also learn what the evidence says about hedge funds. Despite their glamour and reputation, hedge funds perform no better than other actively managed funds, and they're considerably more expensive. Every year, hundreds of hedge funds and mutual funds are closed down or merged into other funds precisely because they've performed so badly, a fact that quietly disappears from the performance records that remain.

The takeaway: the second step to successful investing is to beware of market gurus. Whether they're pundits on television, columnists in the press or celebrated fund managers, their ability to predict markets and consistently beat them is far weaker than the confidence with which they speak.

Chapters / Key points

• Why the financial media is full of market gurus
• Why their forecasts are so consistently inaccurate
• Why they're rarely held to account
• What research says about "star" fund managers
• Why only around 1% beat the market consistently
• Why it takes 22 years of data to separate skill from luck
• How fees consume any value outperforming managers add
• Why hedge funds perform no better and cost far more
• Why hundreds of funds close or merge every year

Transcript

Six steps to successful investing #2: Beware of market gurus

Switch on the financial news on television, or pick up the money section of any newspaper, and you'll see there are plenty of supposed experts giving their opinion as to what investors should do.

But the track record of these market gurus is dismal. Year after year, their forecasts are inaccurate, and very rarely are they held to account for their failure to predict the future.

But, you might be thinking, what about those "star" fund managers who manage to outperform the market? Surely all I need to do is to find one of those to manage my money for me?

Unfortunately, it's not that simple.

Research has consistently shown that only about 1% of fund managers beat the market consistently over the long term. And they're almost impossible to spot in advance. It takes 22 years of data to be 90% certain that a manager's outperformance is genuinely down to skill rather than luck.

And even those few managers who do outperform generally recoup for themselves any value they add in fees, leaving nothing for the investor.

As for hedge funds, the evidence is that they perform no better, and they're far more expensive.

Every year, hundreds of hedge funds and mutual funds are either closed or merged with another fund because they perform so badly.

The second step to successful investing, therefore, is to beware of market gurus.