Success in the markets comes to investors who know the odds, know the potential payouts, and know the cost. They commit capital only when an investment has a favorable risk and return trade-off after costs.
Unfortunately, most people don’t navigate the markets well enough to create a positive excess return after adjusting for risk and cost, and this includes a vast majority of professional investors who run actively managed mutual funds. One way individual investors can increase the odds for success is to avoid these funds. Since it’s not possible to know which fund to avoid, the most logical approach is to avoid all actively managed funds whenever possible.
Index funds weren’t always available, of course. It’s only been since 1976 that individual investors had access to the first index fund that tracked the S&P 500 index. Today, there are well over 1,000 index funds and ETFs that track nearly every stock, bond, and commodity market worldwide, and they do it at very low cost compared to active management. This makes the job of creating an all-index fund portfolio easy.
The benefits of index fund investing are many. First, index fund investors have the highest probabilities of meeting their investment objectives because the returns of index funds are better than the average active funds in every investment category. Second, portfolios of index funds romp portfolios of actively managed mutual funds. Third, the low turnover of securities in most index funds keeps Uncle Sam away from your hard earned money. Fourth, you don’t have to listen to advisors pitch horrible investment ideas or make excuses when their favorite ideas fall off the face of the Earth.
Odds, payouts, and low fees favor index investors. I’ve included some of these odds in a new article on my website. Please see The Odds Favor Index Investors on www.RickFerri.com.
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