Why untrained investors don’t need portfolio managers: Financial expertise makes no difference to investment returns

Having financial expertise does not make you more likely to make the right investment decisions – most of it is just down to common sense, according to a business scholar at a Michigan State University.

 

By studying the private portfolios of mutual fund managers, Andrei Simonov found they were surprisingly unsuccessful at outperforming untrained investors when it came to generating investment returns. 

 

"The point is you have these very educated people who are supposed to know what they are doing, but they are just not that good, on average," explained Simonov, 

 

"I am not disputing that there is a very small fraction of managers who are extremely talented," he continued. "But there are very, very few of these superstars, and the average investor probably can't afford to invest with them anyway."  

 

What this means, according to Simonov, is that average investors might be better off handling their own portfolios rather than paying a high fee for the expertise of a mutual fund manager: “We find no evidence that financial experts make better investment decisions than peers: they do not outperform, do not diversify their risks better, and do not exhibit lower behavioural biases,” Simonov's report says. 

 

He added, however, that managers do outperform untrained investors in stocks for which they have an information advantage, such as stocks that are also held by their mutual funds. 

 

The results of the study are published in the Journal of Financial Intermediation.