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The Advantage of Index Funds

Seth Jentner03/16/2016

Often times, we see headlines from The Wall Street Journal and the Akron Beacon Journal such as:

U.S. Stocks Suffer Broad Losses  ----  U.S. Companies Add 166,000 Jobs in December ---- Obama & GOP at Budget Standstill ----  Walgreens 4th Quarter Profit Soars 86% ---- Weekly U.S. Jobless Aid Applications Tick Up to 308,000 ----  Car Sales Rise as Industry’s Momentum Continues

Now, which is it? That’s the point. The future of the market is unknown. There are and always will be plenty of experts who will offer their opinion about how the daily news will affect future stock and bond prices and interest rates.

This has been true my entire life ... and it will continue. But, what are the actual results of all these experts’ opinions? Here’s how active managers did over the last five years, ending December 31, 2015.

  • 84% of large-cap stock managers underperformed the S&P500.
  • 77% of mid-cap stock managers underperformed the S&P MidCap 400.
  • 90% of small-cap stock mangers underperformed the S&P SmallCap 600.

Is there a lesson to be learned from this? I believe there is. Have you considered index funds rather than actively managed investment funds? These index mutual funds and exchange traded funds do not try to beat the market. They simply purchase the investments of a particular index with no judgment of which companies they like or don’t like. They deliver whatever the market returns, whether positive or negative, less a very small management fee. These index fund investments are transparent, low cost, diversified. They simply mimic the market index return.

The result? They usually perform better than their actively managed cousins who are trying to beat the market. This reduces the risks of selecting the wrong stocks and bonds. The investor can focus on making an appropriate investment allocation rather than trying to pick the so-called “winners.”

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