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Don’t Rely On These ‘Professional’ Investors

By definition, being a “professional” means your level of expertise is greater than that of amateurs. It would be surprising if professional golfer Phil Mickelson routinely posted lower scores than the average weekend player. Do you really believe the tennis champion at your local club would make a credible showing against any of the top players on the tour?

It may appear counterintuitive, but this definition of “professional” does not hold up in the world of investing. “Professional investors” routinely underperform amateur investors, who simply buy an index fund designed to track a broad market index. Once you have an understanding of why this is true, it should fundamentally change the way you invest.

The dismal track record of mutual funds. Fund managers responsible for overseeing assets entrusted to them in mutual funds are the quintessential “investment professionals.” They are devoted full-time to trying to beat their designated index. They have meaningful resources at their disposal. Brokerage firms provide them with reams of research, in an effort to win their trading business. They have great incentives to succeed because their compensation (and perhaps their continued employment) may depend on their ability to beat the returns of the appropriate index.

Read the rest of the article at US News.

 

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