By: Camaran Azumara

Fact of the Day:

An incredible 96% of actively managed mutual funds fail to beat the market over any sustained period of time!

What is a mutual fund?

A mutual fund is an investment program funded by shareholders that trades in diversified holdings and is professionally managed.

There are 7,707 different mutual funds in the U.S. (but only 4,900 individual stocks), all vying for a chance to help you beat the market. As Ray Dalio once said, “You’re not going to beat the market. No one does! Only a few gold medalists.”

Even Warren Buffett, known for his incredible tactics to find undervalued stocks, says that the average investor should never attempt to pick stocks or time the market.

So if mutual funds are so bad, what is an index?

An index is simply a basket or list of stocks. The S&P 500 is an index. It is a list of the top companies (by market capitalization) in the United States by Standard & Poor’s. Companies like Apple, Amazon, and Exxon make up the list.

The point here is that by investing in the index, you do not have to pay a professional to try picking which stocks in the index you should own. It’s been effectively done for you because Standard & Poor’s has selected the top 500 already. By the way, there are number of different indexes out there.

All in all index funds are where it’s at!

Investing in indexes minimizes your costs and maximizes your upsides

The goal in investing is to get the maximum net return for a given amount of risk (and, ideally, the lowest cost).

A portfolio of low-cost index funds is the best approach for a percentage of your investments because we don’t know what stocks will be “best” going forward. And how cool is it to know that by “passively” owning the market, you are beating 96% of the world’s “expert” mutual fund managers and nearly as many hedge fund managers. In investing as Jack Bogle once said, “Don’t do something, just stand there!”

Also, remember the S&P 500 is only one of many indexes or markets.

“The mutual fund industry is now the world’s largest skimming operation, a $7 trillion trough from which fund mangers, brokers, and other insiders are steadily siphoning off an excessive slice of the nation’s household, college, and retirement savings.”
– Senator Peter Fitzgerald

Citations

Tony Robbins. Money Master The Game, 2014