Don't let your adviser fool you. The research and experts all agree. Actively managed funds just don't work.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” - Jack Bogle
About 6 months ago, the guys over at Freakonomics did a special podcast entitled "The Stupidest Thing You Can Do With Your Money". I'm not a fervent listener of Freakonomics, and I didn't read the book. But this one hit the nail on the head. So much so that I consider it required listening for anyone considering investing on their own.
The basic premise of this episode is that the stupidest thing you can do with your money is to invest in an actively managed fund. The podcast references research that proves funds attempting to pick stocks vastly under-perform index funds, especially when accounting for the higher fees associated with actively managed funds. Wall Street insiders have known this for quite some time, but it gets easily buried in all the noise and clickbait investment articles that get pumped out.
It makes sense if you really think about it. Wall Street's fascination with OPM (other people's money) is the fact that there's no personal risk when they get it wrong. There's a paradox in the investment adviser and fund manager world. If active fund managers could really pick stocks, why do they need OPM? Can't they just use their finely tuned financial senses to grow their personal wealth, e.g. Warren Buffet?
Here's where investment advisers come in. Investment advisers love actively managed funds. But why? After all, doesn't repeatable research show that low fee index funds are in the best interest of the investor? It has to do with "revenue sharing", otherwise known as kickbacks or commissions.
Revenue sharing is why most investment advisers love actively managed funds. And some of the biggest wealth managers are guilty. Investment advisers are incentivized to put your money into actively managed funds that under-perform passively managed funds because they receive a commission for every dollar of yours that is invested in those funds. This is not in your best interest. This is not fiduciary behavior.
If you have an investment adviser, ask them how much of your assets under management are in actively managed funds, and how high the expense ratios are for those funds. You might learn something new... perhaps something you don't want to hear.
Better yet, take our class and lose the investment adviser altogether.
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