Think You Can Pick A Mutual Fund That Can Beat the Market? Think Again And Buy An Index Fund Instead!
Based on this recently analysis, go ahead and buy an index fund. Over any recent time period (1, 3, 5, 10 and 15 years) you would have trounced actively managed funds. Of course, “past performance is no guarantee of future results,” however, when you see the persistence of index fund success over short, medium and long-term periods, and the primary reason for it (they carry lower fees), I would put my money (and do) on this trend continuing.
Chart from SPIVA U.S. Scorecard Report (only first four lines, full analysis available by clicking on link):
a. General Motors
Great infographic showing the price action for the Dow Jones Industrial Average over the past 130 years with historical milestones along the way (click on the graphic to enlarge it):
I heard a great conversation today with Roger Lowenstein, former WSJ columnist and Author of Buffett: The Making of An American Capitalist, America’s Bank and When Genius Failed, on the Masters in Business podcast. When asked about how he learned about investing, he mentioned how much he had learned from reading Warren Buffett’s Annual Letter to Shareholders. I thought I would dissect his 2016 Letter and share his often folksy advice in an abbreviated format (the letter is 29 pages long).
I thought you might find these insights useful:
- Page 2 of the letter shows Berkshire Hathaway (his holding company) and its performance vs. the S&P500 (here’s a blog post showing the power of compounded returns).
- Two things to keep in mind during market declines which captures the psychology of investing (not his use of the phrase “sit for an extended period”):
Ok, not the best title but let’s run with it. Let’s start with a question:
You have a choice between two investments of $100,000:
- Investment #1: Earns a consistent 8% return every year (put aside the fact that an investment like this doesn’t exist at the current time; it’s been a while since you could buy a 30 year Treasury Bond with that kind of return).
- Investment #2: Has an average return of 8% per year but has “lumpier returns” aka it has more volatile returns but the returns each year are in the top 10% of fund returns. Some years it is up, some years it is down, but overall it averages the same 8% return as Investment #1.
Which investment has a higher balance at the end of the 20 year period?
A teacher at our recent FinCamp reminded me that we should not forget about the importance of the mechanics of personal finance transactions. What good is teaching students about the importance of investing if they don’t know how to go about setting up an account to buy/sell investments. While we have a activities on how to select a credit card and a bank account, we don’t answer the basic question that many young investors have which is “How do I buy a stock?”
Rather than answer this question for them, have students do their own online research to discover: