You can let a human look after your money, or a computer. Which do you think will make you richer? (The word 'stupid' might give you a clue.)
Although many of Milton Friedman's ideas shaped world economies, they've often been radical. Even last year, at the age 94 and just a few months before he died, the influential economist recorded a podcast for the Library of Economics and Liberty. In it he said, amongst other things, that we should fix currencies and replace the committee that sets the Bank of England Base Rate with robots.
Well, that's what I wish he said, if only for comedy value. But what he actually said was only one step away: he said replace the committee with computers.
He's not the only one that, in some instances, rates computers above people when it comes to money matters. One of my favourite subjects is that of stupid humans vs. the computer when investing in shares.
If you don't choose shares yourself, you have two basic choices. You can choose a managed fund, which has a human running it. He or she will select shares for you and invest the money you contribute to the fund on your behalf.
Alternatively, you can choose an index tracker. These invest in all the shares in an index, such as the FTSE 100 or FTSE All Share, and then the fund's value goes up and down with that index. As it's simply tracking the index, no humans make any decisions, so a computer can do all the work.
I urge you to take a look at our guide to index trackers, particularly the section Index Trackers vs Managed Fund? All the data The Fool has come across over the years has shown that three out of four, eight out of ten and even nine out of ten managed funds fail to beat index trackers!
This means that there are some funds that beat index trackers, but past performance usually has no bearing on future performance, and so far we have seen no reliable and proven way to choose managed funds that will outperform the market.
The next question is: 'Do you need to outperform?' The stock market as a whole has done very well over time, regardless of the performance of individual shares. In fact, it has provided good returns for most of the past 130 years. It has its ups and downs, of course, but provided you're willing to invest for the long-term you can expect to do well.
I admit that there are massive limits to technology. The Motley Fool isn't keen on technical analysis, for example, where computer programs analyse data and charts to tell you when to buy and sell shares. But these programs are making decisions based on rules created by...? Yup, stupid humans!
> More about Index Trackers.
> An alternative to index trackers: Exchange Traded Funds.
> You can buy trackers within a convenient tax-free ISA. We have a few in our ISA centre, but you can find even more if you do your own research!
