ITA Wealth Management

Approximately 85% of all investors continue to pick individual stocks.  The questions is – WHY?  Are private investors somehow smarter than professional mutual fund managers?  Check out this article by Mark Hulbert. Here is one critical paragraph from Hulbert’s article.

“The researchers found a marked decline over the last two decades in the number of fund managers able to pass the False Discovery Rate test. If they had focused only on managers running funds in 1990 and their records through that year, for example, the researchers would have concluded that 14.4 percent of managers had genuine stock-picking ability. But when analyzing their entire fund sample, with records through 2006, this proportion was just 0.6 percent — statistically indistinguishable from zero, according to the researchers.”

If you are interested in reading the original article, here is the reference to the pdf file.  I’ve never seen performance numbers this low for mutual fund managers.  When I read research papers such as this one, I ask myself, are private investors smarter than professional managers or are they expert at self-deception?  There are at least two other reasons why stock pickers make up 85% of the investing public.

1) Stock pickers do not accurately track their portfolio performance and measure it against an appropriate benchmark.

2) Stock pickers do not measure portfolio risk.

Perhaps readers have some other explanation as to why the vast majority of the investing public continues to insist they have the ability to beat the market.

Here at ITA Wealth Management, we recognize we are not above average and therefore construct and manage portfolios around index funds – specifically ETFs.  For investors who are building their portfolios by saving small amounts each month, we think there is no better way than to open up a Vanguard account and use their least expensive index mutual funds.

If your employer has your 401 savings going into managed mutual funds, see what you can do about making the change to index funds.  The research is showing that only fools use managed funds or build their portfolios primarily through picking individual stocks.

If you have problems picking up Hulbert’s article, go to Google News and ask for “The Prescient Are Few.”  That should get you to the article.

http://www.nytimes.com/2008/07/13/business/13stra.html

Lowell Herr

Photograph: Pilot boat at Southampton, England

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