Friday, January 9, 2015

For Individuals, Low Cost Passively Managed Index Funds Will Beat Those Managed by the Professionals ... But the DIY Way Works Even Better

{NOTE: The stock market rallied yesterday, increasing by almost 2%. That's good.

And this morning we'll learn about the unemployment numbers for December. Expectations are for a slight downtick in the widely reported unemployment rate to 5.7% from 5.8%, but the more important numbers will concern such things as (1) wage gains, (2) the number of part-time workers, (3) the quality of jobs created, and (4) the labor force participation rate. Stay tuned.}

But now let's talk about how easy it is for individual investors to outperform the professionally managed accounts.}

Passively managed index funds outperform the vast majority of actively managed funds.

That's primarily due to the simple fact that active managers charge too much more for the added value they provide to their customers.

If two money managers compete and both charge their customers ~1% of the money they manage for doing so, they both won't outperform "Mr. Market." That's simple math, and the total charges by the managers for their investment expertise, advice and services will on the whole reduce the investment returns which their customers would otherwise earn --- and that low cost index funds and actively managed accounts by individual DIY investors actually do earn.

Accordingly, it's hard for active managers to beat Mr. Market in terms of performance, since Mr. Market charges nothing. And in addition, it's not hard to beat the market if a long term DIY methodology is a fundamental part of the investing equation for individuals.

Beating the stock market has become even harder contains this summary of Mr. Market versus active managers for the year 2014:

Only 16% of hundreds of advisers outperformed the Wilshire 5000 last year.
"The stock market is no easier to beat today than it’s ever been.

If anything, it may be more difficult.

In 2014, only 15.6% of the . . . advisers . . . did better than the broad stock market . . . . Five years ago, the proportion stood at 33.1%. . . .

A total of 19.9% of equity mutual fund assets are invested in index funds, according to the Investment Company Institute, the mutual fund industry’s trade association."

Summing Up

The vast majority of individuals don't set aside enough money for their long term financial security.

And most of the money that is set aside would be better invested in a low cost passively managed index fund than in actively managed accounts.

What we need are funds with knowledgeable managers who charge little, if anything, and have the long term interests of their customers clearly in mind when making trading decisions.

My own experience is that it's not difficult to outperform the market.

But I've never paid managers to invest on my behalf, and I firmly believe that the DIY way is the best way.

At least that's my take.

Thanks. Bob.

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