Contrary to their oft articulated goal of outperforming the market averages, investment managers are not beating the market; the market is beating them.
Most investors would be better off in an index fund.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses of the great majority of investment professionals.
Index funds have regularly produced rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a whole and therefore they must, on average, underperform the indexes by the amount of these expense and transaction costs disadvantages.
It’s fun to play around. It’s human nature to try to select the right horse. But for the average person, I’m more of an indexer. The predictability is so high that for 10, 15, 20 years you’ll be in the 85th percentile of performance. Why would you screw it up?
The house (casino) takes a cut on each spin of the wheel, paying out less in winnings than it collects in bets. So roulette is a negative-sum game, and so is your non-index mutual fund.
Skepticism about past returns is crucial. The truth is, much as you may wish you could know which funds will be hot, you can’t and neither can the legions of advisers and publications that claim they can. That’s why building a portfolio around index funds isn’t really settling for average. It’s just refusing to believe in magic.
In these topsy turvy days of volatile markets, who knows what’s up or down? The Dow could be up 250 today, and down 300 tomorrow. It’s a fool’s game playing market direction, and every die hard index fund investor knows it.
Yet even the smartest, most determined fund-picker can’t escape a host of nasty surprises. Next time you’re tempted to buy anything other than an index fund, remember this and think again.
After twenty years of watching investment practitioners dance around the fire shaking their feathered sticks, I observe that far too many of their patients die and that the turnover of medicine men is rather high. There must be a better way. And there is! [index funds].
What is an Index Fund?
A fund which mimics returns of the benchmark index is called an Index fund.
How Index Fund Replicates Returns?
By buying same stocks in the same proportion as the index.
Who launched World’s First Index Fund?
John C. Bogle launched Vanguard 500 Index in 1975 which tracks S&P 500 Index.
Benefits of Index Funds
- Minimal fees.
- Low portfolio turnover.
- Fund size is not a matter of concern.
- Expense ratio goes down as fund corpus increases.
- Passive investing.
- Diversification at a fraction of cost.
- Saves you time as you don’t need to do much research.
- Helps you achieve more from less.
- Saves money as the fees are very low.
Disadvantages of Index Funds
- Returns are slightly less than benchmark index due to tracking error.
Who should Invest in Index Funds?
Anybody who does not have time to invest directly in the stock market, who don’t know to pick winning stocks.
Why Invest in Index Funds?
- To beat inflation.
- For low cost, passive investing approach to investments.
- For indirect and hassle free route to investment.
- To outperform most active mutual fund managers.
- Sip in Index Funds is a Good Habit as well as a Good Karma to reach financial goals.
Moral of the Story
Invest through low cost Index Funds to outperform most fund managers, beat inflation and gold over long period of time without having to do any research.