Over the past 20 years, investing in low-cost index funds has S&P 500 It has come to dominate a large part of the investment climate.
cause? It is cheaper than investing in most mutual funds, there are far fewer transactions (increasing costs), and it is tax-effective to invest in exchange-traded funds (ETFs), the primary structure used to invest in index funds. has the advantage of
We can’t pinpoint the exact date when it became clear that investing in index funds beat out investing in active management, but it was certainly a pivotal moment when Warren Buffett declared it so.
The year was 2007. Buffett made a bet that index funds could beat active managers with Protege Partners, a New York City money management firm that manages hedge fund funds.
of must have been this: Over the 10-year period from 01/01/2008 to 12/31/2017, the S&P 500 outperformed five hedge fund of funds portfolios.
Buffett chose Vanguard index funds as a proxy for the S&P 500. won by a large marginThe five fund of funds averaged a 10-year return of just 36.3% after fees, compared to a 125.8% return for the S&P index fund.
in him 2017 Letter to ShareholdersBuffett took note of the high fees of hedge fund managers and put forward a simple equation he called: “Group A (active investors) and Group B (do nothing investors) make up the entire investment universe. , if B is destined to achieve an average result before the cost, then A is also needed: the group with the lower cost wins.”
His advice to investors: “When trillions of dollars are managed by people on Wall Street who charge high fees, it’s usually the operators, not the customers, who make the big gains. Investors big and small.” Both should stick to low-cost index funds.”
Buffett said something that investors and traders have known for nearly a century has taken a long time to penetrate the average investor’s mind.
Standard & Poor’s has tracked active manager records for over 20 years.their 2022 Interim Report Adjusting for fees and fund exits due to poor performance, we show that 84% of large cap active fund managers underperformed their benchmarks after 5 years and 90% underperformed after 10 years.
It’s so bad that Standard & Poor’s, in a survey of 2019 results, said active managers’ performance was “worse than you’d expect from luck.”
Why is active management underperforming? One problem is that the fees are too high.
The second problem is that fund managers trade too often.
Third problem: Most trading today is done by professionals trading with each other. These traders most often have access to the same technology and the same information as their competitors. result? In most cases, they have little informational advantage over their competitors.
If Buffett, a seasoned value investor, recognizes the benefits of low-cost index funds, it’s also worth checking out whether to include them in your portfolio.
* Excerpt from a book that will be released soon “Shut Up and Keep Talking: Life and Investing Lessons from the NYSE Floor” By Bob Pisani.
Do not miss it:
https://www.cnbc.com/2022/10/03/billionaire-warren-buffett-swears-by-this-inexpensive-investing-strategy-that-anyone-can-try.html Billionaire Warren Buffett Vows This Cheap Investing Strategy Anyone Can Try