Mendoza School of Business

Is your trust in mutual fund managers misplaced?

Published: November 11, 2014 / Author: Mark Huffman

If you ask most people saving for retirement where their money is invested, chances are they’ll say it is in mutual funds.

These funds, made up of a variety of different assets, are popular because the average saver doesn’t have to think that much about them. The stocks within the individual funds are selected by professional money managers, who are paid to know which stocks to buy and which to sell.

Earlier this year stock-picking guru Jim Cramer, host of CNBC’s “Mad Money,” ruffled feathers among professional money managers when he told his audience that “most company 401 (k) plans stink.”

“They have high management fees and administrative costs that eat into your returns, and worst of all, they typically offer you lousy choices for your investments and not nearly enough control over them,” Cramer told his audience. “The 401(k) business is a racket for the managers who get to charge you these fees.”

He went on to recommend that people instead consider investing in a carefully-selected portfolio of about 10 diversified stocks.

It perhaps should be noted that the whole premise of Cramer’s show is to instruct viewers on how to select individual stocks, so his advice might be considered in that light. But the fact remains that millions of individual investors would rather trust their stock picks to the experts.

How good are the experts?
But how good are the experts at picking their own investments – not the stocks they pick for the funds they manage but those in their personal retirement savings? A couple of finance professors took up the question and say you may be surprised at what they found.

“We asked the question whether financial experts make better investment decisions than ordinary investors,” said Andriy Bodnaruk, an assistant finance professor at the University of Notre Dame.

He and colleague Andrei Simonov from Michigan State University selected two groups of investors. One was made up of people who have been trained in finance and had day-to-day experience with financial markets as mutual fund managers.

View story on Consumers Affairs website.