Trying to pick in advance which funds will be among the few that beat the market has proven just as difficult. Morningstar’s famed star ratings have a poor track record of picking winning funds. Brokerage accounts advised by financial advisers achieve lower net returns and inferior risk-return tradeoffs than self-directed accounts.2 Even the expensive investment consultants who advise the world’s biggest money pools have shown limited ability to pick funds.3 The academic research now shows that the best metric for picking funds is the expense ratio: the less you pay experts to manage your money, the more you keep.4
Very few of the highly paid and well-credentialed professionals that run mutual funds and advise client investments actually add value. Yet clients still flock to actively managed funds and expensive advisers. There is, in finance, a massive calibration error: a gap between claimed expertise and actual results.