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Originally Posted by doreenjoy
Actually, "low cost" does not solely refer to the load or commission of purchasing a fund. Low cost also refers to the cost of managing the fund. Index funds have a wafer-thin management cost of 0.02%, while even the cheaper managed funds cost over 1%. That means that every year, you are charged 0.08% more (at least) simply for the dubious priviledge of being in the managed funds.
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-I did say in the previous post that an investor should seek funds with no or the lowest commissions and management fees. And in cases where the managed fund performs better than the index funds, there will be a higher return that more than makes up for a slightly higher fee.
Quote:
Originally Posted by doreenjoy
While it's true that some managed funds do beat the performance of an index in the short term, no one knows what those winning funds are in advance. Studies have shown that between 60% and 70% of managed funds will NOT outperform their respective index funds. If you're very lucky, you can beat an index. Even Peter Lynch could not keep the Magellan fund consistently above the index.
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-It's misleading to tell an investor that an index fund is 100% for sure going to have a more successful performance than a managed or mutual fund and that you will reap gains just by passively investing everything into an index fund. That assumption only is valid in a bull market or upswing. Think about all those whose net worth has declined just as they were about to retire in 2008 and 2009. Furthermore, an active investor will stay with a certain fund and strategy and make portfolio modifications as necessary over the course of the investment period.
Quote:
Originally Posted by doreenjoy
Also, over time *all* funds will revert to the mean (the mean being the index's performance). So if you have a long investment time horizon, you can't beat the performance of an index fund, and you won't have to lose sleep over it.
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-I'm not saying that index funds don't serve a purpose. They can be one part of a multi-prong investment approach. However, they have their limitations, namely plunking everything into an index fund does NOT diversify an investor's portfolio. And everyone's risk tolerance and portfolio allocation will be different depending on age, stage in life and other factors. Those with little knowledge and time will be passive investors for whom an index fund or mutual fund may be more appropriate, but again as one part of the whole. Whereas a more hands-on, savvy investor will take a pro-active approach to their investment portfolio.