you search the Web to find the best price on clothes or
electronics? Do you drive across town to get a discount
on a household item or to shave a few bucks off your
love a deal. But when it comes to their 401(k)s, IRAs,
or other retirement and college savings, many are lousy
shoppers. Consequently, they throw thousands of dollars
away buying inferior mutual funds that will fail to
cover retirement or kidsí college adequately.
talking about big bucks, not the $25 saved on shoes.
years, people have been able to get the most out of
their investment money by buying cheap mutual funds or
exchange-traded funds (ETFs), which are called index
funds. The investment industry also calls them passively
managed funds because the investments in them are simply
gathered together and sit month after month without
funds are the opposite of what are called active funds,
or most of the funds sold to people by brokers or
advisers who often call themselves financial
consultants. Active funds sound appealing because they
employ supposedly brilliant fund managers to
"actively" pick winning stocks and bonds for
you and steer clear of losing investments.
wouldnít like such a fund? After all, no one wants a
trouble is that the brilliant activity rarely works
better than picking a cheaper index fund without any
brainy managers working on your behalf.
is haunting many fund companies, which count on people
buying the higher-priced "actively managed"
investors are getting wise to the fact that they can pay
less and make more money on simple index funds rather
than forking over more money for the expertise of stock
and bond pickers. In the last year, investors poured
about $421.6 billion into simple index mutual funds and
ETFs, according to Morningstar. They only put $48.9
billion into active funds. Thatís a huge change from a
decade ago, when passive funds were still relatively
active funds still are managing more money than passive
funds, with $10.1 trillion versus $4.5 trillion,
according to Morningstar. But over the last few years,
the trend to skip the active fund manager has been
growing dramatically as passive funds have beat most of
the pros during good times and bad times in the markets.
picking stocks or bonds, passive funds have far
outperformed those with active managers at the helm,
said Aye Soe, senior director of research at S & P
Dow Jones Indices.
year, as the large stocks that make up the Standard
& Poorís 500 index gave individuals about a 13.6
percent gain, the active managers who tried to beat that
index flopped. Only 13.5 percent were able to do better
than the index, said Soe. In 2015, only 40 percent have
been able to beat the index. In other words, the extra
fees individuals pay so brainy managers can make money
for them are ending up being a waste.
most stock pickers have failed to be worth their keep in
funds picking small and midsize company stocks. In 2014,
only 27 percent of the active small-cap stock managers
were able to beat the Standard & Poorís 600
small-cap index funds, and only 33.7 percent beat the
mid-cap index, Soe found.
will argue that you canít judge a fund based on one
year, and they are correct. But Soe said most active
managers have also failed in five- and 10-year periods.
Even when a manager wins in a single year, he or she
usually fails to keep it up for five or 10 years.
Itís mostly a matter of fees. People pay more to have
an active manager, and few can pick stocks and bonds
that soar so much that the gains cover the fees. The
average passive fund charges people about 0.2 percent to
use a fund. Itís 0.79 percent for an active fund,
according to Morningstar.
a person invests $10,000 and the investments earn 7
percent annually for 20 years, the person ends up with
$37,200 in the cheap passive fund and $33,000 in the
more expensive actively managed fund. Try it with your
advisers argue that active management is worth the extra
money for more complicated investments like high-yield
bonds, which need to be scrutinized for a potential
bankruptcy. But Soe said that over the last 10 years,
only 10 percent of active managers did better than the
passive funds that invest in high-yield bonds.