Standard & Poors, a major fund rating agency has recently carried out research into tthe extent to which funds which have performed well in the past go on to doing so in the future.
The issue here is not whether active funds are capable of doing well. Some, undoubtedly are capable of generating good returns. The problem, as shown by the Standard & Poors, is that very few of the good performers go on to repeat their previous performance.
So what does this mean to private investors? For one thing it indicates that trying to build your portfolio using actively managed funds, no matter how much time and effort you or your adviser puts into choosing them, is likely to be a complete fools errand. You are likely to pay more for something (out performance) that you are very unlikely to get. In addition, if you are regularly swapping one fund for another on the strength of the poor performance of funds that you already hold in favour of ones that have done better over the same period, you will just be incurring extra costs and most probably spending time out of the market. This is one of the main reasons why large numbers of private investors substantially under perform the markets in which they invest.
The answer is to avoid the uncertainty and extra costs caused by active fund manager selection and instead to build the portfolio through index trackers and passive funds. This is, of course, the second step in the construction of a portfolio. The first is to ensure that you have adopted the correct asset allocation for your needs.
Chris Wicks CFPI help you achieve your lifetime goals for reasons that are important to you
Sunday 30 January 2011
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