Why I don't like investing in funds
Why you should manage your own money
I don't like investing in funds. My problem with funds stems from the belief that only you have your own interests truly at heart. Only you can look after your own money.
Why do people put their money in funds?
People trust their hard earned savings with fund managers for two main reasons. The first is because they don't know what to do with their own money so believe that the easiest solution is to give their money to someone else to invest, a fund manager in this case. The second reason is because some investors believe that there are fund managers who have the ability to generate consistent returns over the long term.
Fund managers earnings
Addressing the first reason, I find it odd that the money that people work hard to save is reasoned to be better in someone else's hands. The fund manager may not have his interests aligned with the investor. The fund manager is interested in earning commissions. Some commissions are earned through the act of selling shares and buying shares. The investor is charged every time the fund manager wishes to change their holding in any stock, either buying OR selling shares.
The fund manager's vested interest is in part in buying and selling as many shares as possible over a given period. That's not to say that there are fund managers that are only interested in holding shares for the long run. However, it suggests that the fund managers interests are not always aligned with that of the investor.
Do fund managers have the magical power of foresight?
With regards to the second belief that some fund managers have the ability to correctly anticipate the direction of markets. Whilst this may be true, the individual is mistaken for a couple of reasons. Firstly, markets are made up of lots of buyers and sellers. Determining the direction of the market is as much about knowing the weighting of buyers versus sellers as it is about the underlying value of a share. There are no fund managers who have access to this sort of information. As such, it is impossible for a fund manager to consistently predict the direction of the market. Over the long run, the market price should be the long term underlying value of the security (share) and a good fund manager should be able to assess this. This moves me onto the second problem with believing that fund managers can predict the future direction of the share.
Let's say that there are fund managers who can regularly make correct predictions on a regular basis. What makes you so confident to assume that you can identify them? Much like picking stocks and shares, just because a fund manager has got the last five predictions right does not mean that they can get the sixth prediction correct. With enough luck anyone can get heads five times in a row with the toss of a coin. It doesn't necessarily mean that they actually KNEW whether it would be heads or tails.
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