‘Up like a rocket, down like a stick’ is a commonly used expression in the investment industry. Dr Benjamin Holdsworth explains why taking a more pragmatic approach will lead to a better investment experience.
Persistently skilled fund managers are a very rare commodity, difficult to identify in advance and hard to live with over time. Anecdotes and examples of great managers are often used to justify ‘active management’, yet even some of the truly ‘great’ managers have failed to live up to their billing.
With active management, a professional fund manager uses his/her judgement to guess which assets will perform better than average.
Paying for this decision-making can involve high costs and high turnover, which eat into returns. Index or passive management, on the other hand, is simply tracking an index, market or asset class with significantly lower costs and turnover.
The risks of active funds – as evidenced by the demise of fund manager Neil Woodford – are very real and unnecessary. Today, investors have the luxury of selecting well-diversified, low-cost funds that are structured to take rational market risks in the pursuit of sensible market returns and ignoring the blinding light of the brightest ‘star’ manager.
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