You Pay A Lot of Peanuts, You Still Get Monkeys

A RECENT press article covered a chimpanzee in Russia who (apparently) randomly chose eight stocks out of 30 in which to invest.

Over the last year the chimp's picks outperformed 94% of her country's investment funds. Of course - and with no disrespect to the ape concerned - this is pure luck. As the commentator in the article says:

"It shows that financial knowledge does not play a great role in giving forecasts to how the market will change. It is usually a matter of more or less successful guessing. And the monkey got lucky."

So if a member of the Pan troglodytes species can have this much luck, why aren't those clever homo sapiens having more luck? How can those whiz-kid fund managers, with all their resources, company visits, quantitative analysis, charts and computer algorithms get beaten by a chimp?

The answer is really in the question: the costs involved with active fund management to pay for those impressive research capabilities (borne by you, dear investor) mean that luck determines who gets the hallowed billboard poster promoting his or her 1st quartile fund over x number of years.

When the luck disappears, so do that manager's funds billboard posters, to be replaced by another "star" fund manager who has the lucky touch (or rather, had it, as past performance is, er, in the past).

The conundrum is that you don't know in advance which active fund manager is going to be the lucky one. It's another risk that you take when investing and it's simply not worth taking.

Active fund management is expensive. Picking a "good" fund manager is about trying to guess which one will have the most luck going forward. Is that really a rationale basis for investing your hard earned cash?

The solution? Firstly, work out the appropriate asset allocation (the split between equities, bonds and commercial property) suitable for your risk tolerances and the demands you will make on your money over the course of your lifetime, which will determine the rate of return you need from your investments to continue to enjoy the life you wish to lead.

{Of course, to do this you need to work out what your Number is.....}

Secondly, reject the notion of active fund (mis)management and invest in your desired asset allocation mix via low-cost passive asset class investment funds that effectively capture the broad market returns of your chosen portfolio elements.

Strip out the active fund manager chimp, and his retinue of very expensive research teams and advertising costs. Otherwise you are paying a LOT of peanuts trying to find the next lucky ape. And the odds are stacked against you.

Chimpanzees split from human evolution around 6 million years ago; those who believe they can identify star / lucky fund managers in advance could be said to have done likewise!

{The above is solely the opinion of Nick Lincoln. It is not individual financial advice and should never be taken as such. If you wish to discuss the issues raised in more detail, please make contact with Nick. If you ignore this small print and act on his opinion(s) without first seeking financial advice or reading at least 100 pages of Key Features Documents containing numerous risk warnings, you may well be struck down by lightning}