Do “financial experts” perform better at stock portfolio selection and management than non-experts coming from a similar demographic and educational background?
No, is the result of a study from Notre Dame and Michigan State researchers.
Sweden’s financial experts did not outperform individual investors
Researchers found that a group of mutual fund managers in Sweden – the “financial experts” – did not outperform a group of individual investors, did not diversify their risk better and did not exhibit a lower level of behavioral bias. The mutual fund managers did outperform when the had an informational advantage over the non-financial experts, such as investing in stocks in which the mutual fund had invested and conducted in-depth research.
Private investments of fund managers perform on par with investments of investors similar to them in terms of age, sex, education level, income, and wealth,” the report noted. “Even more striking, mutual funds managers’ investments perform more poorly than the private investments of the wealthiest 1% of investors.”
The study, authored by Andriy Bodnaruk from Notre Dame’s Mendoza College of Business and Andrei Simonov from Michigan State’s Eli Broad Graduate School of Management, noted that while some of the financial experts can pick stocks that outperform the benchmark performance, they failed to overweight these successful picks in the portfolio due to diversification concerns.
Financial experts know their limitations
The report said that when it comes to weighting, the financial experts, particularly the more experienced ones, knew their limitations. When their mutual fund had conducted a significant degree of research the financial experts knew was reliable, they favored this research over conducting their own research.
While the study showed that the financial experts did not outperform the non-financial experts, it noted a few caveats. It observed that its focus group of non-financial experts might not be as “average” as one might think, as they were generally among the wealthiest and most sophisticated in the country. As a result, they could significantly interact with top level financial experts, both in social settings and through their individual portfolio development methods. Another issue could be the small number of experts and non-financial experts, which might have impacted the data analysis and the sample size validity, the study author’s noted
See full study here: Do Financial Experts Make Better Investment Decisions?