I've several times repeated my advice on investing in individual stocks: do it if you enjoy it, but don't expect to do
better than index funds over the long haul.
The entire group of investors will earn the market rate of return, and the average will be negatively offset by active management fees that are
higher than index fund fees.
So it's simply not true to say that actively managed funds have no chance of earning higher
returns than index funds over the long term.
Of course, but they are the exception, not the rule, and of those who complain, maybe one in five can do better
than an index fund over the long haul.
Most of my portfolio is in individual stocks which might not do any better
than index funds in the long run, but they have done pretty well for me so far.
But for somebody with a reasonably large portfolio, I believe you can effectively create your own index fund for less
cost than an index fund.
Keep in mind that not all ETFs are
cheaper than index funds and trading and annual account fees can vary quite a bit between institutions.
If your brokerage charges $ 29 per trade this will add an extra $ 116 to your annual costs — which makes the ETF option more
expensive than the index funds.
My goal is to generate some impressive turns over multiple decades while taking a passive approach — spend a little more
time than index fund investing for much greater returns.
The sales pitch was immediately fairly strong explaining how they can create a better «fund»
than index funds by creating a portfolio of individual stocks.
Considering the fact that the clear majority of active funds have less
risk than index funds, this is a horrible comparison.
Although ETFs typically have lower
expenses than index funds, you have to pay a commission when you buy or sell them, so you want to minimize trading costs.
A portfolio of private equity and bonds will do about as well as some equity index funds, on average, with a much wider degree of
variation than the index funds.
Mutual funds have much higher management
fees than index funds and almost always will make you less money over longer periods of time.
Costs — the expense ratios are competitive with most open end mutual funds, but still
higher than index funds and ETFs.
To me, ETFs are a little more
complicated than index funds, because they trade like regular stocks, and that might be intimidating if you're new to investing.
Studies have shown that active stock picking and actively managed mutual funds don't do
better than index funds over the long term anyway.
What needs to be demonstrated is whether the 50 % bond, 50 % hand - picked - stock portfolio the advisor is proposing has had greater returns
than an index fund portfolio with the same level of risk.
Expenses tend to be higher for stock funds than bond funds, and higher for actively managed
funds than index funds.
Stock portfolios should thus do better
than index funds if you can just let your System 2 do the thinking, and individual stocks give you other advantages such as better control over timing of realizing gains & losses, etc..
In our view, with investment management fees coming down significantly over the past decade, it is entirely possible for plan sponsors to add skilled active management to their core lineup, at lower cost than in the past and with potentially broader
opportunities than index funds alone.
John Bogle's message is sinking in that stock pickers, as a group, can do no better
than an index fund before fees, and are destined to do worse after.
You can also observe that the returns generated by an actively managed Large - cap fund like SBI Bluechip are far
superior than Index Fund's.
They also have more
liquidity than an index fund, as index funds can only be bought or sold once a day, whereas ETFs can be bought and sold throughout the trading day, so it can be a great vehicle for day traders, and much safer than day trading just one stock.
One question that comes up frequently from investors with small portfolios is whether they should buy low cost index fund such as the TD e-series or by ETFs which have lower
mers than the index funds but you have to pay a minimum of $ 4.95 per trade.
If you'd rather let someone else do the picking for you that's fine, but it doesn't mean that by picking your own you're going to do
worse than an index fund.
No, a recent NerdWallet Investing study found that though actively managed funds earned 0.12 % higher annual returns
than index funds on average, because they charged higher fees, investors were left with 0.80 % lower returns.
The Fidelity analysis finds that, on average, active funds lost less
than index funds during the last three market downturns.
It's worth mentioning also that some SRIs have significantly higher fees
than index funds so if little out - performance is expected than the fees will eat away at the results.
These frictions include management costs and higher taxes; actively managed funds often have higher taxes
than index funds held over the same period.
Does that mean that, going forward, the 3 - stock portfolio is a better bet than the advisor's mutual fund portfolio — and that both options are a better
bet than an index fund portfolio?
(This happens more often with managed
funds than index funds, but still happens occasionally with index funds.)