Were all winners!

Many people are not interested or are scared about managing their own investments. They feel they need a money manager and dont know what questions to ask that money manager before turning over their life savings.

Well its really not that hard to manage your own money if you use a simple strategy. Even if you dont have a knack for it, there are very good funds available you can use.

However with investors I see a lot of active money manager mythology just in casual conversations when people find out I write about this topic.

They immediately want to know stuff like:

1) What is the market going to do?

2) Whats the best fund for them to own now?

3) Do I have any good stock tips?

4) What do you think about investing guru X and his latest prediction?

Etc.

So there is this baseline of knowledge that is not very good and is enhanced by sources like CNBC, Money Magazine, etc. And, frankly, a lot of money managers Ive met believe a ton of this stuff as well (or worse). And those money managers dominate the market so thats what people end up using.

To compound the problem, you get new money managers each day coming online that are taught and believe this stuff as well. Many of them think they can beat the market, choose hot funds, etc. Its ego and ignorance poised to strike.

Given the above, if someone tells me they are a money manager they immediately are guilty until proven innocent. And by innocent I mean:

1) They should be using passively managed investing.

2) They should be focusing on controlling costs.

3) They should be widely diversified and not tinkering with things after setup.

And if they dont understand those three things at a minimum. I would avoid using that person for money management.

One last thing about all of this that applies to a lot of money managers that are picking actively managed funds for their clients. Its this:

They are adding in a layer of abstraction onto a layer of abstraction.

Consider:

1) Out of thousands of funds, the individual money manager is going to pick the winning active fund manager.

2) The active fund manager is then going to use whatever strategy to pick a winning allocation.

3) The active fund manager can change course at any time in many cases and do whatever they feel like doing.

If the odds of picking a group of stocks to beat the market over time is small (and it is), what are the odds of picking a fund manager that will then pick those winning stocks? Pretty bad. Even worse, the investor really has limited control over how their funds will be diversified. They could wake up one day to find the active manager did something very foolish and caused a large loss.

There is zero evidence to suggest that active money management works. People can find anecdotes all day long, but the long term results of consistent returns for the average investor just arent there. An evening of research over at sites like www.vanguard.com will supply all the ammunition you need. You can even start with the SPIVA report I blogged about last year: SPIVA Report Card. The results of active management are dismal.

Not everyone can be above average, but thats exactly what the actively managed fund crowd advertises. That is why I say they are full of ego and ignorance when they think that they can all be winners. The markets just dont work that way and makes losers out of people every day.