In the path to financial independence, one of the key ingredients is to be an investor so that one may grow their capital base or nest egg. The simplest approach has always been to open a brokerage account and buy diversified indices. This is the “set it and forget it” formula and it has worked for many. More sophisticated investors may also dabble into ETFs, which could get into more sector and style-specific investments. But buying mutual funds tends to be a NO-NO for those seeking FI/RE, simply because the fees tend to be much higher than ETFs and index funds. Those high fees compounded over 30 years could mean a 30% loss to your nest egg. Who wants that!!?
Some would argue that those high mutual fund fees are worth it because an active portfolio manager paid millions of dollars must surely outperform the market. But is there empirical evidence to this? Well, according to a recent report by S&P Dow Jones Indices, active-managed funds is having another tough year in 2017, with only 33% of large-cap managers being able to beat the S&P 500. Is that a surprise? Not really. Historical data has always shown that active managers almost never beat the index. In fact, according to this report, this is true for at least the past 15 years!
Why do investors continue to pay high fees to active managers who cannot beat their benchmark? Well, it’s all marketing. The fund companies and their million dollar marketing campaigns are there trying to convince you that their fees are worth it. I can tell you they are not.
What do you think fellow readers? Do you buy index funds, ETFs, or mutual funds? Feel free to discuss below.
As usual, if you have any questions, Ask the Fellow!