Favorite Facts

Fact: There is no correlation between high fees and good mutual fund performance.

Fact: There is a definite correlation between low fees and good mutual fund performance.

Fact: Many studies have shown that over statistically significant time periods, when all investment costs are
considered, most actively managed mutual funds (over 90% in some cases)
underperform their passively managed index fund peers.

Fact: Active mutual fund managers turn over their portfolio holdings much more often than their index fund counterparts. As a result, actively managed funds incur much higher trading costs than passively managed index funds. This hidden cost can effectively double the cost of ownership of the typical actively managed equity mutual fund.

Fact: It is not uncommon for “star” managers of active funds who shine brightly for a year or two, to end up as the dogs in following years. Even those who enjoy some longer term stretches of success (5-10 yrs) often end up underperforming their benchmark index in subsequent years. When tracked over time, true long term “outperformance” by active managers occurs so infrequently, that their success could be explained by luck rather than skill.

Fact: Although extremely important, costs are not the only things that matter in investing. Risk is important as well. Diversification is best way to reduce investment risk. Index funds are more diversified than their actively managed peer funds, making them the most cost efficient way to maximize an investor’s risk adjusted rate of return.

Fact: Investing in an index fund is not a risk free venture. From Jan 1, 1999 to Dec. 31, 2008, the annualized 10 year return for the Vanguard S&P 500 Index Fund was -1.46%

Fact: Investing in a diversified portfolio of index funds (60% diversified stock funds/40% diversified bond funds) over the same ten year period from Jan 1, 1999 to Dec. 31, 2008 yielded an annualized return of 4.5%.
(By comparison the S&P 500 returned -1.46%, Microsoft stock returned -4.6%, 1 month Treasury bills returned 3.6%, the NASDAQ returned -3.2%, and Bill Miller -4.2%— Bill Miller, an active fund manager, has been hailed as an investment genius because his Legg Mason Value Trust Fund beat the S&P 500 every year for 14 straight years.)

Conclusion: One of the best ways to invest for the long term is to build a globally diversified portfolio of low-cost index funds. A diversified group of index funds, that includes all of the major asset classes, will maximize an investor’s potential return, while simultaneously reducing risk and eliminating unnecessary fees.

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