1. Can professional fund managers predict which stocks will go up or down?

If mutual fund managers could consistently identify winning or losing assets, you would expect their returns to show it. But they don’t.

Historically, only about one in five funds survives and outperforms over 20 years. That’s based on research of 2,860 equity mutual funds that existed in 2004. Two decades later, more than half of these funds had folded, often due to poor performance. And only 18% of equity funds were able to survive and outperform their benchmarks over this period. Your chances are even worse for fixed income funds, where only 15% survived and outperformed. Are those odds you’d bet your savings on?

2. Why not just invest in the funds that have outperformed?

Some investors select funds based on past returns, but relatively few winners keep winning. Research shows that most mutual funds ranked in the top-performing 25% based on five-year returns did not remain in the top 25% in the next five years. Only around one in five of the top-performing equity funds stayed on top, and only about a third in fixed income did.

In other words, past performance offers little insight into a fund’s future returns.

3. If stock picking doesn’t work, are there more reliable ways to invest?

Rather than basing an investment strategy on trying to pick the winners and avoid the losers, one approach is to simply buy and hold a slice of a market index through an index fund, gaining ownership of many different stocks. Over the past century, that approach would have rewarded you with a return that far outpaced inflation—and it would have helped you avoid the stress of trying to predict the future.

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

4. Can I do better than just buying index funds?

Yes, because index funds’ focus on matching—rather than beating—benchmarks can be unnecessarily rigid. For instance, index funds have to buy and sell stocks when the benchmark they track changes its holdings, which can happen as infrequently as once a year. Like shopping for roses on Valentine’s Day, that leads to a lot of people buying the same thing at the same time, which drives up prices. Constraints like this mean that when you invest in index funds, you may be leaving money on the table.

5. So how do I set myself up for success?

A more effective investment approach for fund managers is to be flexible, buying and selling stocks throughout the year based on information backed by financial science on what can improve expected returns.

Academic research into decades of stock returns has identified long-term drivers of outperformance. Smaller companies, those with lower prices, and those that are more profitable have had higher returns, on average. By investing systematically in the areas with higher expected returns, you can aim to beat the market.

6. Why should I invest internationally?

Investment opportunities exist all around the world, but the randomness of global stock returns makes it difficult to predict which markets will outperform from one year to the next. For example, Austria was the best-performing developed market in 2017 but the worst the next year (and, in 2021, the best again). Holding a globally diversified portfolio that targets higher expected returns better positions you to capture higher returns wherever they appear. And a strong year in one country can help offset a weaker one elsewhere.

7. What about those hot tips I keep hearing about?

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If you find the barrage of hot tips tempting or unsettling, consider the source and what is news vs. entertainment. Do yourself a favor: Tune out the noise.

8. What should I do when the market tumbles?

Markets go up and down each day. When they fall, it’s tempting to pull money out in the hopes of avoiding losses. You can put money back in when things turn around, right? Think again. Research has shown that there’s no reliable way to time the market. It has also shown that the impact of being out of the market can be profound, even for just a short time. Staying invested—focusing on the long term—helps to ensure you’re in position to capture gains when prices rise.

9. So, when is the right time to invest?

Every day, stocks are priced to deliver a positive expected return. That means now is always a good time to invest. This goes against the “buy low and sell high” mantra that leaves some people trying to find just the right moment to invest. Frequent reports of all-time market highs may keep you from buying, thinking surely what goes up must come down, so I better wait.

But research shows that buying shares at all-time records has, on average, produced similar returns to stocks bought following a sharp decline. That means trying to time when to get into and out of markets is unlikely to lead to better results.

10. How can a financial advisor help?

We rely on professionals in so many areas of our lives. When you get sick, you can scan the internet searching for a remedy—or you can go to a doctor who has years of training on the best, safest way to help. Trusting an expert with your financial health is no different.

A financial advisor can provide expertise and guidance. They can help you focus on taking constructive actions that add long-term value, not impulsive ones you may later regret. And they can help you build a portfolio based on financial science that is expected to outperform the market.

Consider whether you’d benefit from help with any of the below:

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