This final part looks at how the investment industry demands of active fund managers don’t match what the role of the industry should be. The financial system should also change from the current short term focus to a long term focus.
Finally, this final part ends where Part 1 began – “Is it skill? Or is it luck?”
The irony of how the markets function is that the passive investors need the active investors for all markets to work properly. If nobody trades, the markets stop (prices won’t change if nobody buys or sells). Active investors often underperform the markets through fees and poor timing (buy high, sell low) demonstrated through numerous Dalbar studies.
A point not mentioned in this series: you may shoot the lights out through market returns meeting or exceeding expectations, and still not reach your goal! How? By under-saving (relying on the market returns to do all the heavy lifting instead of continuing to add the money that will increase the principal amount upon which earnings grow (the more the principal, the more the earnings, given the same return). For some reason, people tend to forget this basic principle (market returns vs saving more).
PS. I’m not a “fund manager,” I’m a Certified Financial Planner managing client expectations towards their goals with their money. This four part series talks about those expectations.
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