Trust | Leeds on Finance

Trust | Leeds on Finance.

See the paper referenced in the blog post:

A tremendous amount of research shows that professional money managers underperform passive investment strategies (i.e., buying an index fund) net of fees.  Two prior studies show that mutual funds underperform passive indexes by 65 – 67 basis points (after fees).

Even worse, many investors pay fees to a manager who then helps them invest in underperforming mutual funds.  When you consider all fees, some studies show that investors underperform passive funds by 2%.

So, you have to ask yourself, why do you pay for a money manager rather than invest on your own?

The Reason

Among other things, money managers offer:

  1. Knowledge about how to diversify
  2. Trust, experience, dependability — peace of mind

Peace of mind might be the most important thing you get.  Managers help you to invest in risky assets.  They allow you to take risks that you might not have taken on your own. In effect, while you may underperform the index funds, you may be outperforming your risk-free investments (or your mattress).   In other words, advice may be costly, generic or even (sometimes) self-serving…but, you still may be better off.

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