As banks have increasingly proven, they do not need our savings – hence rock bottom interest rates. Once we do the math and deduct inflation (2%) from the little interest we still get paid for our savings (0.2% under lucky circumstances), or from equally meagre Euro-bond yields, we will have to realise that the more we save, the poorer we get. Like it or not, if we wish to see any positive returns, we will have to change from being savers to becoming stock investors. This will involve new risks.

Traditionally the place to go were mutual funds: many savers put their money together and a fund manager then decided which stocks to buy.

The idea behind it was that a large pool of money can disperse risk much better by investing in many different companies at the same time. Some companies would do better than others and the risk of picking the one which loses out or goes under would be mitigated. A good theory, albeit one which over the last few years has become increasingly difficult to defend.

Actively managed funds have lost quite some lustre lately, as statistical evidence is growing that over time the rise in value of ALL stocks put together in a specific market, as gauged by so-called indices, perform equally well or better than shares of carefully vetted companies by fund specialists. Ironically, stock market indices were often the ‘benchmark’ against which the performance of a fund manager was measured, and it made them look bad. Who needs an expert when the blind reproduction of the whole market will yield similar results?

I do not believe that the theory was wrong altogether. It is just not suited to our times anymore. In the past market participants were few and well informed. Inside knowledge was still different from (illegal) insider trading. Good information was hard to come by and it paid to keep digging for the truth.

We will have to change from being savers to becoming stock investors

Remember Rothschild’s carrier pigeons informing him before anybody else about the defeat of Napoleon? In a time of computer-driven investment decisions and immediate and wide-spanning connectivity, good ideas will be drowned out by trillions of unthinking dollars moving in fractions of a second and in unison. If a fund manager in 2017 were to unfailingly outperform everybody else it would attract the SFO rather than praise.

What does not improve the lot of our hapless experts is the fact that they are expensive: to invest in an actively managed fund one has to pay entrance fees of typically 5% and yearly management fees of up to 2%. Whether their performance will be abysmal or praiseworthy is hard to tell, but these expenses will be a sure burden and a certain dent in final results. Index tracking funds in contrast cost almost nothing.

So if both types of fund performed equally well in equal markets, as they did over the last few years, the cheaper one will certainly outperform at the bottom line.

Such ‘passive’ funds can in theory track any index, be it gold, pork bellies, CO2 emissions, bond markets, specific industry sectors, or certain regions. The variety on offer increases almost on a daily basis. The most popular funds will track the major stock markets though, in the US, Europe, Japan, the UK or Hong Kong. What makes most tracker funds nowadays even more attractive is that investor participation can be freely traded on a stock exchange.

While in the past one had to notify the fund manager of the intention to cash out and wait until the equivalent of shares were sold at market prices often inducing untimely losses (not only for the redeemer but potentially for all other investors in the fund too), the investor of an Exchange Traded Fund, or ETF, can sell her share in the fund on the stock exchange, leaving the fund’s wealth untouched and fully invested. In times of panic, as the new theory goes, asset prices will not deteriorate as the fund is never forced to sell. Investors will sell their share in the fund, but not the underlying assets.

I don’t want to see this theory tested under duress. It’s hard to believe that when an ETF comes under sale pressure and its stock value plummets that the underlying assets will not suffer too. Most investors will have invested in ETFs for exactly that reason: to get in and out without hassle, at a low cost without strings attached.

The decision to exit a particular market will be taken precisely because of worries about the market itself in which the ETF has placed its investments. In times of stress, this easy exit route might prove not to be easy at all. Therefore, if many ETF investors would try to sell their share participation at the same time, not only would the value of the ETF drop rapidly, persuading yet more investors to sell, but the underlying assets too. A major trend disparity is difficult to fathom. If it occurred, who will be the lucky one to pocket the difference?

So, back to square one, back to the old, trusted mutual fund manager, right, who might have the glorious wisdom to cash out before the financial world goes down the drain? Trusted-hands experience – versus artificial intelligence? Success will not be guaranteed, alas, but at least you will have someone to besiege with complaints...

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

Please send in any suggestions for Andreas Weitzer to discuss in his column to editor@timesofmalta.com – Subject: Sunday Times Personal Finance.