Flip a Coin, Beat a Fund Manager

(And What to Do About It)

Heads, they win. Tails, you lose. When you pay high fees to a hedge fund or mutual fund manager, they’re guaranteed to make money. You’re not. In fact, the more you pay in management fees, the worse your after-expenses returns will tend to be over time.

It’s not picking the right fund manager that counts; it’s paying the lowest fees. That means most fund investors should favor low-cost index funds.

Quite simply, most money managers don’t add value to investors through their stock picking acumen. A recent study of 2,862 funds showed that most underperform their own market benchmarks. As the New York Times (March 14, 2015) put it, “If all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all — if they had merely flipped coins — they would, as a group, probably have produced better numbers.”