The S&P Dow Jones Indices just released some news and it’s horrible. The S&P is up over 200% from the lows six years ago. That’s the good news (if you’ve been invested in stock funds).
The bad news is you could’ve just dropped your money in a cheap fund that mirrors the S&P 500 index and made more or the same amount of money as you would have made investing in an expensive fund that does not mirror an index.
Let’s back it up.
An index fund mirrors/invests in the same stocks that are in a given index, like the S&P. It is passively managed in that there is little hands-on work since the fund just mirrors an index.
The latter is an “actively managed” fund. Actively managed funds require someone making buy/sell decisions based on their independent proprietary research, sophisticated stock analysis, and some sort of bottoms-up top-down analysis with an upside down funnel image segmented by various shades of the same blue.
This study shows that over a 10-year period, 82% of active fund managers (who invest in the stock of large companies) did not outperform their benchmark, which is an index.
All this means is that with all their buying and selling and funnel charts, you can make the same (usually more) by just investing in a benchmark fund, or an index fund, like we talked about above. The fees on these funds are considerably lower. That is one of the main reasons why actively managed funds have a hard time beating index funds: once they take out their high fees, the returns, i.e. the money that goes in your pocket, is much lower.
This is not news. Here are similarly bad results from 2013.
So what does this mean for you? It means you need to decide if you’re going to go to bat for yourself or not.
You work with a financial advisor or broker who might direct you to their own firm’s funds that are high-fee with no extra reward for you. Or they might direct you to external high-fee funds, that they then get a kickback from, again with no extra monetary reward for you.
This is the biz. Is it the worst thing in the world? No. Is you paying high fees better than not being invested at all? Absolutely. Will investing in low fee funds make you a millionaire and investing in high fee funds make you poor? No. Will you have more money in your pocket (thousands and thousands of dollars) over of the long-run by investing in low fee funds? Absolutely.
If you want to start poking around in conversation with either your financial advisor, broker, or that 1-800 number you call on your statements, go in with a plan of attack. Do you want to know if there are cheaper alternatives for you (more money in your pocket)? Do you want to know what to ask? Good. We are sending out a simple five point list early next week. Don’t be scared. This is no-brainer easy stuff to ask. Not “I want to fight my financial advisor” type stuff.