What are my chances of picking an investment fund that outperforms?

Simon Brown, Partner and Chartered Financial Planner, explains the degree of competition that all investors face and what this means for trying to outguess the market.


Simon Brown, Chartered Financial Planner:


When it comes to making estimates for future asset class returns there is no absolute certainty. If forecasts of future returns could be made with a high degree of certainty then all investors would invest in the highest returning assets and ignoring all the other asset classes. The odds of finding an investment fund that survives a long period of time is like flipping a coin and choosing between heads and tails. The chances are even less with outperforming expectations.


The markets pricing power works against investment fund managers who try to outperform through stock picking or market timing, as both survival and outperformance rates tend to fall as the time horizon expands. This table shows only 40% of equity funds survive and outperform their benchmarks over a 15 year period. It surprises investors that many mutual funds or unit trusts become obsolete over time. About half of the equity in fixed income funds were no longer available after 15 years.


Financial markets favour long term investors who understand that the market is unpredictable and that diversify their portfolio across many asset classes.