Why We Cannot Outperform Professional Money Managers Consistently

With the wealth of financial information available to virtually every investor today, it should not come as a surprise that so many of us feel we can “outsmart” the market and yield better returns than higher-priced mutual fund managers. In fact, a great deal of investors feel that even keeping a diversified investment portfolio that invests strictly in Index funds can also yield more favorable results than those produced by expensive portfolio managers with enough letters behind their name to make a bowl of Alphabits blush.

The sad reality, however, is that most of us cannot achieve better results than professional investment managers. This makes sense on a whole bunch of different levels (emotionally, psychologically, intellectually, etc., etc..) but consider the following three things we tend to do that actually cause us to be worse off.

1. We buy what was popular. When faced with a choice of where to invest our limited resources, we will often side with the option that brings a better track record. This makes sense; we want something with a history and the better the history, the better we will feel about investing our money there. However, when we chase last year’s winners instead of diversifying properly, we should expect to see 40% less at the end of a 15-year investment stint.

2. We purchase the wrong assets for the wrong reasons. Investing successfully when it comes to a smaller portfolio (anything under $500 million is considered a small portfolio when compared to mutual funds) has a lot to do with market timing. This means we have to selectively enter the market at certain entry points and exit at certain exit points. This is impossible to do consistently. Portfolio managers invest their funds when they are available and use cash to balance out their holdings rather than go “all in” on one specific asset or class.

3. We spend too little time getting to know the companies we have an interest in. Unlike fund companies that can send someone across the world to spend time with a company’s foreign department head, as individual investors, we are more likely to spend time analyzing financial statements and stock price charts. Of course, these are all “backward-looking” items and as we know too well, historical performance is never indicative of future performance. To really understand a company’s strengths and prospects, we need to spend time with the management team and get an idea for their challenges and expected successes, something that is not properly expressed in the annual statements.

If we were able to avoid the three common problems listed here, we would be a lot more successful when it comes to investing like (and against) the professionals. However, limited capital, time and expertise keeps us from doing these very things, meaning that it makes more sense for us to invest our money with those expensive fund managers after all.

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