Go With Index Funds

Flee Actively Managed Mutual Funds

Let me quote extensively from Ferri's "Power of Passive Investing" book.

"In every asset class, the odds of beating index funds are low, and the payout for being right is well below what a fair payout should be.  The only conclusion one can draw from this data is that active management cannot compete against passive management in any asset class, style, or sector in the long run.

"Only U.S. equity index funds were available to investors up until the 1980s.  Investors had no choice except to purchase high-cost actively managed mutual funds for most asset classes.  This is no longer true.  Today, there are hundreds of low-cost index funds and ETFs that cover a wide variety of asset classes, styles, and sectors.  Choose funds that follow understandable market benchmarks, have low fees, are fully liquid, and tax efficient."

Ferri supports the above statements with mounds of data in his book.  I highly recommend it to all serious passive investors.

Eschew Active Management

 

 

Richard Ferri writes in his book, "The Power of Passive Investing," – "Efficient investing is different from efficient markets."  How true.  Following recommendations of Ferri, Bernstein, Swedroe, and other index advocates, we seek to advise investors to set up and manage well-diversified portfolios in order to increase the probability of success.  Success is increased if index investment vehicles are used.  Here at ITA Wealth Management, we recommend investors use index ETFs and avoid actively managed mutual funds.  The jury is still out on Fundamental Index Funds, and we are not completely shutting them out of our portfolios.

The reason for eschewing active management and actively managed mutual funds in particular is the hurdles they need to jump.  Fees are just one.  Right out of the gate, the probability of selecting a successful actively managed mutual fund is low.  I've been there and know the difficulty.  What is particularly troubling, and Ferri points this out in his Passive Investing book, is that investors rarely stop with selecting one mutual fund.  Instead, they buy fund after fund, a sure formula for under performance.  Why? 

If we have a 60% chance of losing ground to an appropriate benchmark in a given year with one actively managed mutual fund, by adding a second and third fund we increase the probability of losing even more ground to the benchmark.  Adding more actively managed mutual funds to a portfolio reduces the probability of outperforming the benchmark and the problem is exacerbated as more years pass.

And the solution?  Use index funds or better still, index ETFs.  This blog is loaded with suggestions.  Just surf around using categories of interest.  The links are found on the right-hand edge of every blog entry.  For full access, become a Platinum member.