March 10, 2014
Some “smart” people say investing with index funds is for the novice, not the experienced investor. Why is this a hollow argument?
Some “smart” people say investing with index funds is for the novice, not the experienced investor. Why is this a hollow argument?
This is invalid because index funds most of the time beat the managed funds and beat people who pick individual stocks, people say that they are for the novices because its so easy and it involves no work really on the part of buying and selling, you just buy the fund then your done, they don’t know how much better index funds can be to picking individual stocks and managed funds, index funds have the lowest costs of all of those also.
Additionally, these same “smart” people tend to be two sorts.
1) The sort that sell managed mutual funds and depend on average people falling for their sale schemes.
2) They may be the sort of individual that has never tasted the benefits of no load index mutual funds. They have only invested with managed funds or individual stocks and in turn it’s all they know.
In reality, both people have been duped by the sales people because they truly believe in these over glorified managed mutual funds or other investments such as investing in individual stocks.
Lastly, managed mutual funds frequently fail to beat their benchmark. Unlike, index funds that offer the most, but cost the least.
You gentlemen covered the issue quite well. Well done! Here are some quotes from some mighty smart people. When making your investment decisions, who will you listen to? Your local financial advisor/life insurance agent/investment broker? Or, will you listen to these wise teachers who are looking out for YOU.
Most investors, both institutional and individual, will find 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) delivered by the great majority of investment professionals. – Warren Buffett, Berkshire Hathaway chairman 1996 Shareholder Letter
The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value. You want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds. Investors should simply have index funds to keep their fees low and their taxes down. No doubt about it. – Jack R. Meyer, former president of Harvard Management Company, who tripled the Harvard endowment fund from $8 billion to $27 billion.
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 expenses and transaction costs disadvantages. – Burton G. Malkiel, A Random Walk Down Wall
Invest in low-turnover, passively managed index funds and stay away from profit-driven investment management organizations. The mutual fund industry is a colossal failure resulting from its systematic exploitation of individual investors as funds extract enormous sums from investors in exchange for providing a shocking disserve. Excessive management fees take their toll, and manager profits dominate fiduciary responsibility. – David Swensen, chief investment officer of Yale University