Do Financial Experts Make Better Investment Decisions?

Do Financial Experts Make Better Investment Decisions?

November 12, 2014 Research Insights
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(Last Updated On: January 18, 2017)

Do Financial Experts Make Better Investment Decisions?


We provide direct evidence on the effect of financial expertise on investment outcomes by analyzing private portfolios of mutual fund managers. We find no evidence that financial experts make better investment decisions than peers: they do not outperform, do not diversify their risks better, and do not exhibit lower behavioral biases. Managers do much better in stocks for which they have an information advantage over other investors, i.e., stocks that are also held by their mutual funds. More experienced managers seem to be aware of the limitations to their investment skills as they increase their holdings of mutual fund-related stocks following poor performance of their portfolios. Our results suggest that there are limits to the value added by financial expertise.

Alpha Highlight:

Financial experts beat individual investors (with the same demographic profile) for the following reasons: investment expertise, financial sophistication, and experience.


This paper finds that “Financial experts are no better than their peers:”

They do not outperform!
They do not diversify better!
They do not exhibit lower behavioral biases!

The authors’ claims are based on investment decisions of two groups in Sweden:

  1. “Financial experts” group: paper chooses “mutual fund managers” as a group of “financial experts.”
  2. “Matched Individuals” group: the authors identify a control group of individual investors (peers) who are similar to mutual fund managers in terms of socio-economic characteristics, but do not possess known financial expertise.

The two groups are matched by wealth, labor and capital income, age, sex, family status, and educational achievement.

Key Findings:

The table below shows monthly returns of different groups by position. The difference in average monthly returns for managers and matched peers [(1)-(4)] is only 9 bp — statistically insignificant from zero.

To disentangle the effect of financial expertise from that of information advantage of mutual fund managers, the paper further split portfolios of managers into two sub-groups: MF-related positions–positions that are owned by they fund they manage–and non-MF positions.

Notice that the difference between managers and peers are even smaller when their positions are non-MF related [(3)-(4)], only 5 bp.

2014-10-31 13_06_06-Do Financial Experts Make Better Investment Decisions.pdf - Adobe Reader


Table 6 in the paper shows that experts are not better at diversifying their portfolios. Also, Sharpe ratios for managers are indistinguishable from Sharpe ratios for matched investors.

Table 7 in the paper indicates that experts suffer from disposition bias (sell winners, hold losers), just like the rest of us poor blokes.

Are you Smarter than Your Financial Expert? Maybe…

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

  • Michael Milburn

    Wes, I wanted to pass this link along. There might be something interesting to think about here when thinking about market behavior, concensus, contrarianism, and bubbles / booms/ and busts.

    Why Hipsters all look alike

  • IlyaKipnis

    Yet here I am afraid to recommend almost anything on my blog to any retail investor, when mutual funds fail them left and right! How do so many of these people stay in business when their performance leaves so much to be desired? Just about every academic consensus I’ve gotten a whiff of has stated that mutual fund managers can’t generate alpha, yet some of them charge their fees anyway. What ever for?

  • fascinating!