I am often asked to give financial advice to friends and colleagues partly on the grounds that I am an economist and partly because, it is supposed, I have a fair bit of experience in investing. My response is that I have no special expertise in making investment choices although I do have strong views on what should be avoided.
Generally, I support a version of the efficient markets hypothesis in financial markets. So, I do not generally believe that activist investors can outperform the market in the longer-term. Of course, there are thousands of funds out there making stock selections so that, purely by chance, some will make above-average returns short-term and sell themselves as stock-picking superstars. However ex-ante it is impossible to pick which of the investment funds are going to be the winners.
I agree with Warren Buffett that investment funds that charge high fees are a pure con. They typically take a fixed percentage of your assets – usually around 2% per year but some take more than that. In addition, if they should be lucky enough to earn above-average returns they will hit you with performance fees of between 15-50% of an “excess” return. Effectively you are paying them with a fixed fee for giving them the chance to gamble with your money. This no-loss proposition is the core reason finance courses are so popular in universities. The courses themselves generally (there are important exceptions) have little or no academic content. Most of the run-of-the-mill courses feed off the fantasy of sitting in front of a computer and raking in millions.
Some people do need financial advice to develop their savings and to manage such things as their retirement. That such people are regularly cheated of their life savings is a testament to this. The best source of advice is commission-free, fee-for-service advisers, examples include the large superannuation funds, that are used for their advice but not as vehicles for investment. If Mr Bluesky, the smiling accountant, tips you to invest in his olive oil plantation give him a big miss. And try to learn a bit about investment yourself. Burton Malkiel’s “A Random Walk Down Wall Street” is a great start as are older classics such as Benjamin Graham’s, “The Intelligent Investor” which dates from 1949. Both of these books can be purchased for less than $100 and they will give you far more information than any paid investment advisor (or myself) can give.
Like Malkiel I strongly favor investment in “no” or “low”-load mutual funds (including index funds and ETFs) that are publicly listed on the stock market. Management costs are tiny and accessing your funds is a snack. The key to realizing great wealth is to start investing early in your life, to develop a reasonably diversified portfolio and then exhibiting patience, thereby allowing the effects of compound interest to grow your wealth.