Thursday, January 6, 2011

Looking Through the Eyes of an Active Manager

By Arianna Capital

Even with all the tricks we will see in this article, active managers still seem to believe that they can beat the market. Let's get a better idea of what active managers actually are so we can identify them and choose our investment adviser correctly.
Often, active managers tout their ability to beat the market and pick stocks. They use software like the images bellow to complete their tasks.

or even more complicated...

They enjoy using complicated research as well...

You could expect many more slides like the one above. So, what? My manger is doing his diligent homework to make sure my portfolio is adjusted for all market conditions. Really?

Well let's find out. How many active managers actually beat the market? And, can they do it year after year?
(click to enlarge)

This chart shows that from 1999 - 2009 most active managers fail to beat their respective index or market. They do not add value to you over time - due mainly to their larger fees and tax costs.
So, what would happen if you were the lucky one who changes managers every year to find the needle in the haystack, best manager ever.

(click to enlarge)

This chart says that - okay, some managers can beat the market this year or that, but they can't do it consistently. Over the years the outperforming funds fail, one by one. So, while it is possible to find the active manager that is worth his salt - they are few and far between. It is better for your financial health to relax into low-cost index funds, practice good financial planning, and good risk assessment.

So, even after active managers spend hours analyzing reports and graphs they are still in no better shape than a so called passive manager who just bought low cost index funds. Most actually turn out being in a worse spot. Instead, what your manager could be doing is looking at your entire wealth solution - your entire plan. They could be brainstorming new ideas for your tax mitigation, wealth preservation, insurance, estate planning, further education, et. cetra. In short, your manger is wasting your precious payment doing something that does not further your future goals. It is time to find one who will. Refer to this other article for more help on choosing the right manager for you.

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