Sep 8, 2009

Don't invest in mutual funds

Here are two quotes from "New Facts in Finance, J. Cochrane, Chicago Fed 99".
Thus, if there is skill in stock picking, we should see some persistence in fund performance. However, a generation of empirical work found no persistence at all. Funds that did well in the past were no more likely to do well in the future.
and
Since the average fund underperforms the market, and fund returns are not predictable, we conclude that active management does not generate superior performance, especially after transaction costs and fees. This fact is surprising. Professionals in almost any field do better than amateurs. One would expect that a trained experienced professional who spends all day reading about markets and stocks should be able to outperform simple indexing strategies
Why the hell do people keep on putting their money in? There are virtually no transaction costs associated with looking up this information. It's even on Wikipedia. Where is the rationality?

6 comments:

Pierre-Louis said...

well, investors also have tailored needs and interests that are different from market indices...like the RDB, we are not trying to outperform the market, just trying to fund growth enhancing projects...

hoze said...

what? You're not trying to outperform the market? Give me back my 9 Chf :-)...

Cam said...

My answer - sheer laziness.

Putting your money into a mutual fund means that you don't incur the costs (i.e. in terms of time) involved with actively managing your own portfolio. It's much easier to delegate this task to someone else, even at the cost of achieving lower returns.

TomasHozik said...

that's the thing, they underperform an index... So you buy an index, spent a year at home watching TV and drinking beer and then make on average higher profit than the guys who were trading the whole year like crazy...

Cam said...

So the essential message is that Homer Simpson would be a better stock trader than the professionals managers......maybe that explains the popularity of DIY share trading?

.......I guess when you put your money into a fund, you can at least fool yourself that people who 'know something' are looking after your money.

TomasHozik said...

agree, Homer Simpson would beat an average mutual fund :-)