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This is the basic risk vs. return tradoff in investing lesson. Risk in stock market can be reduced with diversification and longer time-span. Don't listen acti

This is the basic risk vs. return tradoff in investing lesson. Risk in stock market can be reduced with diversification and longer time-span. Don't listen active investors unless they have most of their own money in the scheme and manage your money on the side (like Warren Buffet does). Figuring out winning market strategy and selling it as a service to others and living off management fees indicates that the winning strategy involves separating fools from their money.

eru 9y ago
And thanks to competition between capital suppliers (ie you) the successful active managers will raise their fees until they eat all the excess return. The only escape from the efficient market is investing in markets that are such small pockets and difficult to reach that professionals ignore them. But that's almost impossible to square with diversification.
- Nokinside 9y ago
  Active fund management competes with clever marketing. Most active fund management companies have several actively managed funds. They close or merge low performing ones or turn them into closet index funds (index hugging). They market those funds that happen to perform just now and show 1-3 year performance numbers. Newcomers can sell simulated profits without fees or trading costs.
  - eru 9y ago
    Yes, though the passive guys can hire some clever marketing people just the same.
- dsacco 9y ago
  > And thanks to competition between capital suppliers (ie you) the successful active managers will raise their fees until they eat all the excess return. What actually tends to happen in practice is the really successful active managers cease accepting money, because they can effectively print it. All strategies have capacity constraints and managing investors is not so fun. If you can generate positive returns without needing to pool risk, you don't need investors anymore.
  - eru 9y ago
    Yes. Same effect in practice: you can't give your money to people who produce above market returns after fees.

eru 9y ago

And thanks to competition between capital suppliers (ie you) the successful active managers will raise their fees until they eat all the excess return. The only escape from the efficient market is investing in markets that are such small pockets and difficult to reach that professionals ignore them. But that's almost impossible to square with diversification.

Nokinside 9y ago
Active fund management competes with clever marketing. Most active fund management companies have several actively managed funds. They close or merge low performing ones or turn them into closet index funds (index hugging). They market those funds that happen to perform just now and show 1-3 year performance numbers. Newcomers can sell simulated profits without fees or trading costs.
- eru 9y ago
  Yes, though the passive guys can hire some clever marketing people just the same.
dsacco 9y ago
> And thanks to competition between capital suppliers (ie you) the successful active managers will raise their fees until they eat all the excess return. What actually tends to happen in practice is the really successful active managers cease accepting money, because they can effectively print it. All strategies have capacity constraints and managing investors is not so fun. If you can generate positive returns without needing to pool risk, you don't need investors anymore.
- eru 9y ago
  Yes. Same effect in practice: you can't give your money to people who produce above market returns after fees.