Saturday, November 18th, 2017

Think before firing that fund manager

Michael Nairne wrote an article in the National Post that provides healthy advice about the consistent tendency of investors to change mutual fund managers at the wrong time, for the wrong reasons. 

For many years I have emphasized to clients how important it is to make rational, careful selection of fund managers before investing with them, and then being very hesitant about changing them.   There is a large and growing body of research known as behavioral investing that examines a variety of investor activities.  The article by Michael Nairne discusses one that found newly chosen managers underperform the previous managers.  Other studies show that the more trading that takes place, the lower investor returns become.  It may not be surprising to learn that men tend to trade more frequently than women.  Are you shocked to learn that investors tend to chase funds that are on a hot trend, and can you guess the eventual outcome?

All of these behaviours interact and lead to much poorer results than expected by average market returns.  You would expect the average investor to achieve average results.  In fact, there appears to be a skewed distribution of results, with patient, knowledgeable institutional investors reaping higher than average results while the average individual gets lower results.  This is one version of the old saying “the rich get richer”. 

Every minute of every day the financial media feeds you an endless stream of data, often suggesting you should act now to take advantage of an investment opportunity and certainly providing a vast array of contradictory recommendations.  I believe you should ignore 99.99% of this, if not all of it.  After all, you have a financial advisor who spends many hours every year on continuing education and your fund managers and their research teams spend every working moment trying to identify good investment decisions. 

While it is fine to read, think and ask questions, significant changes in your investment approach should be quite rare and very carefully considered.  Spend some time making informed choices to delegate the detailed work of financial planning and investing and then visit your advisor once or twice a year to review your situation, goals and plan.

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