In this video, author Jack Schwager tells us how, when choosing a fund to invest in, that fund manager's past returns are no guarantee of future success. Many people turn to mutual funds and index funds to invest for their future. Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically undersaving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Learn about The Shocking Can't-Miss Truth About Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.
Brendan Byrnes: Let's talk about how you evaluate fund managers, maybe looking at a mutual fund or another fund. Do past returns have any relevance there at all?
Jack Schwager: Past returns are potentially very, very misleading. As I said before, you have to separate the market effect -- how much of it is the market -- from the manager.
You can look at how a manager does, given what a strategy is. Yes, you look at returns, but you have to be in the context of what the underlying market did, and in the context -- this is very important -- of the amount of risk undertaken to get that return.
This is another mistake I point out: People pay too much attention to return. "Oh, this guy made 40%. He's a great manager." Well, you know what? You take a 20% manager; you know how to turn him into a 40% manager? Just double all his positions.
Anybody can double their returns by taking twice as much risk. If you look only on the return side, you miss a critical element, which is how much risk was taken to get that return. I personally -- and I allocate, because one of the things I do is I'm a portfolio manager for a fund -- and I never look at returns by themselves.
I never look at it. It means nothing. I will only look at return in context of the amount of risk taken.
The article How to Spot a Good Fund Manager originally appeared on Fool.com.
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