When it comes to investing in stocks, long term performance is the important measure. Since it is a long term investment, the best measure is long term results. Not 1, 2 or 5 year results.
Yet, most active fund managers are incentivised for performing well in these short time frames. Performance bonuses, awards nights, fund of the year, 1 year performance data, workplace promotions. They all incentivise many fund managers to achieve good short term results.
If a stock picker is not performing good short term results they will likely be demoted or fired.
It would be interesting to find out which fund managers invest in their own funds. This would be a very important metric as it shows the fund managers interests are more likely to be aligned with your own. Talented fund managers who have skin in the game are more likely to have rewards in place for better long term performance, acting in the long term interests of investors, and less likely to take excessive risks in return for potential short term gain.
Incentivisation also matters. If a fund manager is incentivised for long term performance, they are more likely to retain staff and be more aligned with the investors investing in the fund. Whereas short term incentives, will see fund manager goals at complete odds with investor goals.
Active managers always want to beat the index. Many are incentivised to achieve short term results. This is not what I would consider a good match for a typical long term investor. What you want is a long term focus. I couldn’t care less how my funds perform in a given year. All I care about is how much money I have in 20 years. If my fund is not managed in the same way as my beliefs, then we have a problem.
Is your fund manager as careful with your money as they are with their own?
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here