Funds Matter
The Importance of a Solid Line-Up
Warren Buffet Warns: Don’t Try and Stock-pick Your Way to Financial Freedom (Or Buy Mutual Funds Who Say They Can).
Although the plan providers we use have over 30,000+ possible funds to choose from, the investment lineups we oftentimes recommend are comprised mainly of low cost index funds as compared to many plans which are made up of actively managed funds which are trying to “actively” beat the market (index) through stock picking. Owning all the stocks in an index through a low cost index fund is called indexing or passive investing. This style is contrary to active investing, in which you pay significantly more in fees (sometimes 10 to 30 times more) to a mutual fund manager to make choices about which stocks to buy or sell. The active manager wants to beat the market but study after study shows that few actually do.
Overpaying for underperformance
Percentage of active managers who failed to beat their benchmark index (15 year period ending in 2019)
The results are as follows:
%
LARGE CAP FUNDS FAILED TO BEAT THE INDEX
%
MID CAP FUNDS FAILED TO BEAT THE INDEX
%
SMALL CAP FUNDS FAILED TO BEAT THE INDEX
%
REAL ESTATE FUNDS FAILED TO BEAT THE INDEX
%
INTERNATIONAL FUNDS FAILED TO BEAT THE INDEX
%
EMERGING MARKET FUNDS FAILED TO BEAT THE INDEX
%
MUNICIPAL BOND FUNDS FAILED TO BEAT THE INDEX
%
HIGH YIELD FUNDS FAILED TO BEAT THE INDEX
Source: SPIVA 2019 Year-End Scorecard
From 1984 to 1998, a full 15 years, only 8 out of 200 fund managers (4%) beat the Vanguard 500 Index. The Vanguard 500 is a mirror image of the S&P 500 index.
Source: Research Affiliates/Robert Arnott
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors. Mutual fund investing involves risks, including possible loss of principal.
“Most investors, both institutional and individual, will find that the best way to own common stocks (shares) 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.”
Warren Buffet – Letter to Shareholders (2019)
Warning to employers
Just because a 401(k) plan has low cost index funds, doesn’t mean you are reaping the benefits. Why? Because many large providers will add low cost index funds as options and then layer on significant fees to make up for lost revenue sharing of more expensive funds. This entirely defeats the purpose of minimizing fees to maximize performance.
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Investing always involves risk; no investment is protected against loss. Past performance does not indicate future results. Diversification does not ensure a profit or protect against declining markets. Consider your investment objectives before investing.
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