Every time we have a bull market, there is another study that confirms what a similar study during the last bull market showed, i.e., index-investing out-performs active-investing. A new study by Lipper shows that 85% of large-cap mutual funds failed to beat the S&P. A confirming fact is that 2014 saw a record number of hedge funds, who are always active investors, closing and sending funds back to the clients, because their investment performance was so poor.
Index-investing means buying exchange-traded-funds (ETFs) or mutual funds that simply mirror indexes, such as the S&P. Their fees are usually lower, because they don't try to "beat the market." Active-investing means trying to outperform the indexes or beating the market. If index-investing outperforms active-investing and costs less money, why not be an index-investor?
One huge problem with this study is that this out-performance by index investors only works during bull markets but not during bear markets, which are far more scary. Active investing usually outperforms index investing during bear markets. Active investors allocate a larger proportion of their funds to cash during a bear market. Index investors do not. Active investors can also shift allocation toward consumer defensive stocks, which usually retain more value during bear markets..
Another problem is there are plenty of examples of mutual funds outperforming ETFs, which demonstrates the importance of picking the right mutual funds, especially during bull markets.
Lastly, it assumes there is no value to financial planners besides making investments. Serving as a chief financial officer to a client obviously has great value, such as advising on estate planning, college planning, gifting programs, divorce planning, etc. Little things like taking care of annual minimum required distributions (MRDs) from IRAs is one example. And, just "being there" when there is a death in the family brings tremendous value to a client or their family.
While there are no guarantees in investing, I do guarantee that there will be yet another study during the next bull market, confirming the Lipper study in this bull market, which confirmed a similar study during the last bull market.
Index-investing means buying exchange-traded-funds (ETFs) or mutual funds that simply mirror indexes, such as the S&P. Their fees are usually lower, because they don't try to "beat the market." Active-investing means trying to outperform the indexes or beating the market. If index-investing outperforms active-investing and costs less money, why not be an index-investor?
One huge problem with this study is that this out-performance by index investors only works during bull markets but not during bear markets, which are far more scary. Active investing usually outperforms index investing during bear markets. Active investors allocate a larger proportion of their funds to cash during a bear market. Index investors do not. Active investors can also shift allocation toward consumer defensive stocks, which usually retain more value during bear markets..
Another problem is there are plenty of examples of mutual funds outperforming ETFs, which demonstrates the importance of picking the right mutual funds, especially during bull markets.
Lastly, it assumes there is no value to financial planners besides making investments. Serving as a chief financial officer to a client obviously has great value, such as advising on estate planning, college planning, gifting programs, divorce planning, etc. Little things like taking care of annual minimum required distributions (MRDs) from IRAs is one example. And, just "being there" when there is a death in the family brings tremendous value to a client or their family.
While there are no guarantees in investing, I do guarantee that there will be yet another study during the next bull market, confirming the Lipper study in this bull market, which confirmed a similar study during the last bull market.
