The November 2, 2006 edition of the Wall Street Journal featured an article by Diya Gullapalli entitled "It May Be Time to Bet on Index Funds - Actively Managed Portfolios Are Pressed to Find Stocks That Can Beat Benchmarks" (subscription required). The article highlights a slew of recent research that suggests index funds that track benchmarks could be the way to go in comings months.
Quotable quotes from the article include:
Merrill Lynch & Co.'s October report titled "Time to Index?" pointed out that while more than 60% of stocks in the S & P 500 stock index outperformed the index in 2001, that figure has declined to below 50%. This could lower the odds active managers will spot big stocks that can beat the benchmark.
"It may be time to move out of the active-manager realm and into the passive manager," said Bill Sickles, a former Lipper Inc. senior research analyst.
Large cap index funds have pulled in $3.8 billion in net cash through September, but actively managed peers have lost $8.8 billion.
And last but not least:
"I'm hearing people kind of mumbling about indexing my large-cap US stocks and then adding an active manager for small and international" areas, said Andrew Smith, chief investment officer of Northern Trust Global Advisors.
It makes no sense to mumble when discussing this issue with your trusted investment adviser. Say it loud, say it proud!
Dear Trusted Adviser:
The active investment strategies we've pursued for years are not adding any value. In fact, they are detracting from value, particularly after fees. I am tired of my portfolio returns failing to best investment benchmarks due the underperformance of highly, compensated active managers.
Lets try to be smarter with my life savings. I want you to start using more intelligently designed investment products and services, like exchange-traded funds (ETFs), for their greater efficiency and performance reliability. I would feel much more confident in achieving my investment objectives.
Yours Truly,
The Boss
I used to think that actively managed funds are worth the high fees if they bring you high enough returns. But lets face it - the reality is that the S&P 500 beats the returns of 80% of actively managed funds so how "lucky" do I have to be to get into those 20%, and how good those actively managed funds have to be to outperform index funds in terms of profit AFTER I pay the needed taxes and fees. Because index funds have not only lower fees, but also save you from taxes (due to the fact that index funds hold the stock longer than the other types of mutual funds) and thus generate higher returns by allowing you to invest those saved money.
So for a buy-and-hold investors index funds are the right solution and if someone is still not convinced in that, that someone should read the article that convinced me: Index Fund Investing and pay attention to the "Arithmetic Element".
Posted by: Steven | October 02, 2007 at 07:13 AM