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):
Let me explain what you see here. S&P Dow Jones does an annual analysis where they compare investment performance for:
- Actively managed mutual funds (that is, a collection of stocks put together by an “active” manager who you pay about a 1% annual fee to) to….
- Index funds (a collection of stocks that mirrors a specific index (like S&P500) where you pay about 0.05-0.15% annual fee to match the market)
For investors thinking that they are getting something extra for paying the 1% fee, well, chances are that the higher fee you are paying active managers to beat the market almost assures you that you will NOT beat the market. The percentages in the chart indicate how often the index funds are BEATING the active managers over different time frames and let’s just say “it ain’t pretty.”
I would focus the students on the first four lines in the chart which look at ALL domestic mutual funds and then divides that universe based on the size of companies in the mutual funds (Large, Mid and Small Cap). For example, looking at the Large Cap Active Funds which are being compared to the S&P500 index (which is made up of the 500 largest companies in the US) in line 2, we see that over the long-term (15 year period), the index has beaten 92.15% of Large Cap funds.
Questions for students:
- What percentage of Small Cap active funds were outperformed by the S&P Small Cap 600 over a 1 year period?
- According to the chart, 34% of Large Cap active funds outperformed the S&P500 over a 1 year period (so 66% underperformed). Given this recent performance, do you think it makes sense to invest in Large Cap active funds?
- Active investment managers often tell their clients that you shouldn’t compare them to index funds over the short-term but that you should look at the long-term performance. Does the long-term performance (say 15 years) strengthen the argument that you should invest in an active fund and not an index fund? Provide evidence for your answer.
- Focusing on the first four lines of the chart, develop a headline that compares active investing to index investing.
- How does this chart impact your investing strategy?
Want to teach your students about index investing? Check out this NGPF Webinar “Teach Investing in Two Hours” which includes a link to the lesson and will put your students in position to choose investing options for a 401(k) plan or ROTH IRA.