Your Wealth Journey Investment Insights – What to Do with a Unicorn

There comes a time in the experience of most investors when a unicorn appears before them. It usually manifests as an expert, a can’t-miss manager that just seems too good to be true. In this situation, it’s good to remember that unicorns, like risk-free investments and Nigerian princes who need your help, are not real.

ONE IS NOT “THE ONE”

There’s a good reason why the “unicorn” doesn’t exist among managers. It’s because independently thinking groups are better at getting accurate results than even the most intelligent and informed in the group. Whatever wisdom an individual has is already baked into prices. Adjustments to new developments come fast and furious, much more quickly than a single person can react.

BUT I’VE GOT “A GUY”

Let’s say that, despite what you know about why groups beat individuals, you still have one extraordinary broker or fund manager or television host who strikes a chord. You have “a guy.” And maybe you’re right. Your guy might have a stellar track record and a Midas touch. Shouldn’t you just trust your guy instead of settling for average market returns if he or she is doing better?

Well, to be blunt, no. You shouldn’t. The truth is, if investors could depend on experts to outperform on every time horizon, we should be able to see credible evidence. Unfortunately for them, and anyone who has “a guy,” the evidence is quite contrary.

Not only do the greatest “active managers,” often fail to beat comparable market returns, they often don’t survive. In 2013, Vanguard showed that only about half of around 1,500 actively managed funds available in 1998 survived until the end of 2012. Meanwhile, only 18% had outperformed their benchmarks.

PROVE IT

There have been numerous studies around the world that have criticized active manager performance, or lack thereof.

As early as 1967, a paper by Michael Jensen concluded that there was insignificant evidence to suggest that any fund could do better than if it acted in random fashion.

More recently, a study by Eugene Fama and Kenneth French showed that paying for an active manager usually only means that you’re buying lower returns.

All told, between the two studies, there have been more than 100 other similar studies that serve only to echo their findings. But it’s not just mutual funds.

Having a hedge fund might sound luxurious, but they’ve fared no better. Barron’s looked at hedge fund survivorship in 2014 and found that, of all hedge funds available in 2013, 10% had closed by year’s end. If that’s not alarming enough, nearly half the available funds in the preceding five years were no longer available. There might be many reasons for this, but you’d have to believe that if they’d performed, they’d still be around.

BEST BETS

Though it might feel right to have a go-to active manager who seems more plugged in, it’s important to remember that being plugged in doesn’t mean much.

Now, most investment professionals will steer clear of gambling metaphors. We’re not most investment professionals, so here’s a gambling metaphor. Don’t bet on a bettor. The bettor might think he’s got a system. He might even be on a hot streak. But eventually, luck runs out and the odds catch up. It’s a much better idea to bet on the house. It might give away a few dollars here and there in the short term, but it wouldn’t stay in business if it wasn’t winning.

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Read More from Atlas Wealth Advisors

• The Introduction to this Series: Becoming a Better Investor
• Start Your Retirement Journey Series
• Find Your Financial Focus