If you haven't read Part 1 yet, click here.

Why can’t I just pick one of the 10% of funds that has outperformed its benchmark?

The truth is you can…if you can identify it. While we certainly have back-tested data, mutual funds have very weak, if any, levels of correlation from year to year. In other words, how a fund performs in one year is in no way a predictor of how it will perform in future years. This ultimately leads to the conclusion that trying to choose the fund that will outperform is a fool’s errand.

Undoubtedly, some of the brightest minds in the world show up to work every single day trying to outpace the market, yet they fail nine times out of 10. I certainly don’t have the hubris to place my clients hard-earned money into a situation where they under-perform 90% of the time, and I sincerely wonder what the advisors who push active management know that I don’t. Perhaps this is how they justify their fees?

To me this seems to fly in the face of an overwhelming body of evidence pointing to the contrary.

One Big Exception

Exception doesn’t quite seem like the right word here, but I was struggling to find the right word, so we’re rolling with it. The one big exception is if you are making a choice of active management for reasons other than performance.

What other factors are there? The main alternative factor that clients have expressed is a desire to not inadvertently support companies who violate their values (i.e., a Catholic client who strongly opposes abortion does not want to invest in, or profit from, a pharmaceutical company’s production of an abortifacient drug). This is no doubt a noble pursuit. It is worth recognizing that the act of screening the investments, whether done by a person or technology, does come at a cost, so expect slightly higher fees in this space.

I have a tremendous amount of respect and admiration for those who choose to live with this level of intentionality in their life. We are fortunate to have access to several funds that have faith-based screens for our clients to choose from.

So, what does this mean for the average investor?

Ultimately the conclusion drawn by the average investor should be that actively managed funds do not lead to higher levels of return. While I can certainly understand utilizing a more active strategy to help control the types of companies that you are investing in, I find it difficult to find any other reasons to do so.

If you are currently utilizing a financial planner it is worth it to ask if they are engaging in an active investment management strategy, or you can Schedule a Meeting with us here at QED Wealth Solutions to help evaluate your portfolio.

If the data says investments should be boring, why should I hire a financial advisor?

If the only reason you have for hiring a financial advisor is for investment management, then you should put your investments into a simple portfolio of index funds and save the cost it takes to work with a planner. While I plan on creating more content regarding what makes a good financial planner at a later date, I will simply say here that a good planner should be able to work with you on many more things including tax planning, retirement income planning, risk management, estate planning, matching your risk profile with your asset allocation, asset location, and much more.

As stated in our core values, we believe that the value of working with a financial planner should exceed the cost of doing so and a well-executed plan leads to lower levels of stress and higher levels of happiness. We firmly believe that we can deliver on both of those here at QED Wealth Solutions.

This post is for educational and entertainment purposes only. Nothing should be construed as investment, tax, or legal advice.