Funds Matter

Warren Buffet Warns: Don’t Try and Stock-pick Your Way to
Financial Freedom (Or Buy Mutual Funds Who Say They Can).

 

 

Americas Best 401(k) is comprised only of low cost index funds as compared to most plans which are made up of actively managed funds which are trying to “actively” beat the market (index) through stock picking.   Owning all the stocks in an index through a low cost index fund is called indexing or passive investing.  This style is contrary to active investing, in which you pay significantly more in fees (sometimes 10 to 30 times more!) to a mutual fund manager to make choices about which stocks to buy or sell.   The active manager wants to beat the market but study after study shows that few actually do.


Overpaying For Underperformance

Percentage of active managers who failed to beat their benchmark index (15 year period ending in 2016)

LARGE CAP
FUNDS FAILED
TO BEAT THE INDEX

MID CAP
FUNDS FAILED
TO BEAT THE INDEX

SMALL CAP
FUNDS FAILED
TO BEAT THE INDEX

REAL ESTATE
FUNDS FAILED
TO BEAT THE INDEX

INTERNATIONAL
FUNDS FAILED
TO BEAT THE INDEX

EMERGING MARKET
FUNDS FAILED
TO BEAT THE INDEX

MUNICIPAL BONDS
FUNDS FAILED
TO BEAT THE INDEX

HIGH YIELD
FUNDS FAILED
TO BEAT THE INDEX

Source: SPIVA Scorecard. For more information, feel free to download the SPIVA Scorecard here.

warren

“Most investors, both institutional and individual, will find that the best way to own common stocks (shares) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”

Warren Buffet – Letter to Shareholders

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From 1984 to 1998, a full 15 years, only 8 out of 200 fund managers (4%) beat the Vanguard 500 Index. The Vanguard 500 is a mirror image of the S&P 500 index.

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Source:  Research Affiliates/Robert Arnott




Warning

Just because a 401(k) plan has low cost index funds, doesn’t mean you are reaping the benefits.  Why?   Because many large providers will add low cost index funds as options and then layer on significant fees to make up for lost revenue sharing of more expensive funds.   This entirely defeats the purpose of minimizing fees to maximize performance.

“When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there’s almost no chance you end up beating the index fund.”

David Swensen – Author of Unconventional Success

 

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