Why Does The Stock Market Go Up?: Everything You Should Have Been Taught About Investing In School, But Weren't

by Brian Feroldi

Misaligned Incentives: Most mutual funds earn money based on the total dollar amount of the assets that they manage, not based on the performance of the fund. A mutual fund with $1 billion in assets will make 100 times more revenue than a fund with $10 million to assets, regardless of how the fund performs. For this reason, mutual fund managers spend a lot of their time convincing investors to give them money instead of focusing on the best investment strategy. Career Risk: To outperform the market, a mutual fund manager needs to be willing to invest in novel ways. However, when you invest differently than other investors, you run the risk of underperforming for long periods of time. If a manager performs poorly while investing unconventionally, they have a harder time justifying their actions. That increases their risk of being fired.