I remember back in the day when index funds were the second-choice of almost every investor.
But based on what I've seen lately, the tide has certainly reversed.
Let's begin with some great thoughts from 20 Something Finance who quotes the following:
“84% of large-cap funds generated lower returns than the S&P 500 in the latest five-year period and 82% fell shy in the past 10 years.”
And yet 67% of all invested U.S. assets were in actively managed funds. Ugh.
The key findings:
“The expense ratio is the most proven predictor of future fund returns.” The takeaway is this: high expense ratios eat in to fund performance, outweighing any other perceived performance benefits. And actively managed funds have higher expense ratios than passively managed funds, and subsequently lower performance.
Moving on, Barbara Friedberg lists 5 Reasons to Choose Index Funds for Your Investment Portfolio as:
1. Index Funds Are Proven Winners
2. Index Funds Streamline Investment Decisions
3. Index Funds Lower Costs
4. Nobel Prize Winners and Financial Luminaries Support Index Fund Investing
5. With Index Funds – All Your Money is Working For You
Some thoughts on these:
- #1 is a result of #3 as we've seen above.
- Index funds do make it easy. In fact, all you need is three funds.
- Warren Buffett, one of the greatest investors in history, recommends index funds. This alone is good enough for me to invest in them!
- Some other very smart people invest with index funds as well. :)
I've been investing in index funds for at least a couple decades now, thanks to Vanguard. In fact, almost 60% of my assets are now in index funds.
How about you? Where do you invest your money?