Average Swedes can do as well as financial experts
Some investors could be making poor choices because of their earlier successes.
You would think that stock brokers and portfolio managers – people who work with stocks as a living – would find it easier to make the right, profitable decisions.
But financial experts can make the same mistakes as anyone else. This was seen in a study of 84 Swedish mutual funds managers.
About half of the Swedes, experts who had worked on small and medium-sized stock funds, had received recognition and won prizes for their shrewd management of other people’s money. But they had less to brag about when researchers saw how they invested their own money in the stock market.
When researchers compared the experts with others their age, in the same income bracket and with a similarly long education, the stock picks made by the experts were only averagely successful.
They earned neither more on the market nor less than the average lay investor.
On the whole they made their decisions just like any other Swede. Like others who invest in stocks, they bought and sold shares much too often, which apparently can be a losing strategy.
By looking through the official web pages of the large Swedish stock funds, the researchers found the names of 218 mutual funds managers. Then they checked out these persons’ tax records.
These professionals’ incomes were evaluated with the stocks they owned. In Sweden and Norway, this information is accessible to the general public.
The researchers selected experienced mutual funds managers. After weeding out all the persons they were uncertain about, for instance when there were two with the same name in the tax rolls, the researchers ended up with 84 funds managers and their private investments.
The researchers stress that their results do not apply to all Swedish stock market experts or those who manage funds abroad.
Could be overconfident
Oddly, one reason why experienced people sometimes make simple mistakes is that they have experienced so much success.
A new study looks at why some investors buy stocks when they are selling too high. Apparently they have too much confidence in the stock market. The more gains a person has achieved previously the greater the chances that an investor will fail to observe the golden rule of buying low and selling high, according to a study from researchers at the University of Missouri.
“Overconfidence appears to be a major issue when it comes to making investment mistakes,” said Associate Professor Rui Yao, one of the researchers behind the study in a press release.
These researchers looked 4,800 US households and found that those with high incomes and low assets were the most likely to buy stocks when the market was cresting. That meant they were at the most risk of losing money when the stock market dipped again.
According to Yao these Americans mitigated this risk when getting the advice of financial advisors.
Translated by: Glenn Ostling
- Andriy Bodnaruk and Andrei Simonov: Do financial experts make better investment decisions? Journal of Financial Intermediation, 2014. DOI: 10.1016/j.jfi.2014.09.001
- Rui Yao and Shan Lei. Prior investment outcomes and stock investment in defined contribution plans. Applied Economics Letters, 2015. DOI:10.1080/13504851.2015.1128067