Bad News for Stock Pickers

Jahnke, William
March 2000
Journal of Financial Planning;Mar2000, Vol. 13 Issue 3, p40
Academic Journal
This article focuses on the stock picking practice engaged by individual investors and financial advisors either directly and indirectly through the use of actively managed mutual funds. The failure of actively managed mutual funds to produce superior returns to index funds on average funds is well documented while the success of investors if less documented. Many financial advisors prefer not to select stocks, instead relying on their skills to find good mutual fund managers. The problem with adding value by successfully picking active mutual fund managers is formidable. Not only does stock picking reduce expected returns; on average, it introduces additional risk that can be diversified away using index funds and exchange traded funds. This additional risk can produce a significant reduction in returns over the investor's investment horizon. Financial advisors should focus on finding low-cost ways to invest in asset classes. This can include index funds, exchange traded funds or passively tax-managed, broadly diversified portfolios of individual stocks.


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