Eschewing Managed Funds
Lately, I’ve had The Oblivious Investor on my mind, and it really isn’t much of a surprise. Recent concerns with the stock market have many people — people I know and emails from readers — wondering if it is time to abandon the stock market altogether. Mike, The Oblivious Investor, frequently argues that long-term nothing else can beat stocks in terms of actual returns. However, he’s talking about a timeframe of at least 20 years. And recommending index funds, which follow performances of overall indexes rather than relying on stock pickers and fund managers.
The key, of course, is to avoid managed funds. Funds have the potential to limit your risk, since they are composed of a variety of stocks. This results in less exposure to loss than if you only had one stock. However, it is important to note that funds do lose money. And, if you choose managed funds, you also have expenses and fees to pay. This cuts into your earnings. Index funds and ETFs have much lower expenses, meaning that you keep more money.
The Oblivious Investor offers a great illustration of how the managed funds racket works:
You can see, by the green lines, that money goes from investors into actively managed funds. Then the industry spends advertising dollars with the mainstream financial media. And the media sensationalizes the hottest ways to make money by moving your money around incessently. You’ll notice, though, that money does not flow to investors in this manner (the purple line).
Before you act on that “hot tip” or that amazing “advice”, it is worth taking a step back, and considering your strategy. Most ordinary folks find better success — and keep more of their money — when they ignore the sensationalism and stick with a basic investing plan.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
