youíre new to investing, an index mutual fund is an
easy way to get diversification at a low cost. But a
survey by MFS Investment Management, a Boston-based
asset management firm, shows that not all investors know
the correct definition of an index fund or know what
theyíre taking on when they buy the funds.
among young people who gave already accumulated a lot of
wealth ó the survey was limited to investors with
$100,000 and more of investable assets outside
retirement accounts ó there is confusion.
clearly a need for investor education," said
William Finnegan, head of global retail marketing for
RISK: One point of confusion had to do with risk.
listing the major reasons for owning index funds, 45
percent of Gen Y investors in the survey (defined as
those younger than 34) selected "minimal risk"
as one of their answers.
worries that investors may think index funds are less
prone to losing money than the alternative option, an
actively managed mutual fund. "But thatís not
true," he said.
index fund will own a basket of stocks or bonds similar
to that of a market benchmark, such as the Standard
& Poorís 500 stock index. If the market goes down,
the index fund will decline as well.
in point: In 2008, when the S&P 500 fell a total of
37 percent, the Vanguard 500 Index fund, which tracks
the U.S. large-stock index, dropped the same amount.
an index fund, you own whatever the market is that youíre
investing in," said Fran Kinniry, a principal in
the investment strategy group at Vanguard, which
launched the first index-tracking mutual fund in 1975.
If that market declines, so too will the fund tracking
Kinniry also points out that the risk of losing
significantly more than the market is minimal. The same
is not true of actively managed funds.
funds can suffer bigger losses (or bigger gains) because
an investment manager is deciding which stocks and bonds
to buy or sell.
take on the risk that the manager makes the right
decisions," Kinniry said.
DONíT ALWAYS GET IT RIGHT: Through Feb. 28, just 51
percent of actively managed U.S. stock funds had a
one-year return that beat their benchmark, according to
numbers werenít better for longer periods. During the
past 10 years, only 41 percent of funds delivered a
benchmark-beating annualized return.
WHAT YOU OWN: So, do young investors understand the
differences in risk? Thatís hard to tell. Many people
seem to spread their bets. In the MFS survey, nearly
two-thirds of investors, regardless of age, who own
index funds also own actively managed funds.
not everyone can correctly identify what an index fund
is. In fact, 41 percent of all investors in the MFS
survey said they had no idea what the definition of an
index fund is.
investors may have been thrown off by the wording of the
question, which used the term "passive
investments" to describe index funds.
funds are a type of passive investment strategy because
the funds follow a benchmark, rather than owning
investments that are hand-picked by a manager.
Finnegan argues that investors, young and old, should
study the pros and cons of actively managed and index
funds. There are risks to both types of funds.
should know what they are," he said, "before