Passive Investing: The Evidence the Fund Management Industry Would Prefer You Not to See
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Published 2012-11-29
A remarkable 54-minute film featuring some of the world's top economists and academics and demonstrating:
* how the claims of active fund managers to be able to beat the market are largely a myth
* how costs are the biggest drag on performance - and why active costs more
* how passive investing offers the best experience for the vast majority of investors
* the benefits of a diversified portfolio in guaranteeing consistent returns
* why passive investing is better for your health
* why active investing has held sway for so many years....
* ... but why things may be changing
* and why passive is the rational, mathematically proven route to investing success.
Investing for the future... It's an issue none of can afford to ignore.
No one's job is safe these days... How would you cope if you lost yours?
We're all living longer too... So are you saving enough to fund 25 years or more of retirement?
Can you really afford to pay for your children or grandchildren to go to university - or help them onto the property ladder?
And what about all those holidays you promised yourself?
We entrust the vast bulk of our investments to fund managers.
Here in the UK, according to Her Majesty's Treasury, the industry has more than four TRILLION pounds of investors' money under management.
Fund managers invest people's savings wherever they see fit - mainly in equities, or shares in listed companies.
They claim to be experts at making our making grow, using their expert knowledge to pick the shares that will outperform the market.
But all too often the returns they produce are considerably lower than the average return of a benchmark index like the FTSE 100 - or the S&P 500 in the States.
For veteran investment guru John Bogle, the problem is simple. Fund managers just aren't as smart as they like to think they are.
As it means trading against the view of numerous market participants with superior information, buying or selling a security is effectively just a bet. So, whilst your fund manager might lead you to believe it's his knowledge or intelligence that enables you to beat the market, he's really no better than a gambler.
So, you might be lucky enough to choose the right fund manager. But you could just as easily pick the wrong one.
According to the financial services company Bestinvest, there are currently nearly £10 billion of UK investors' money languishing in what it calls dog funds - in other words, funds which have underperperformed their benchmark index for at least three consecutive years.
Ultimately, of course, fund managers are businesses. They exist to make money for themselves. They want our business - even if it means persuading us to invest in a fund which they themselves wouldn't want to put their own money in.
It's now time to look at what it actually costs us to invest.
Fund managers are, of course, businesses. And, like all business, they have overheads.
Running a big fund management company doesn't come cheap - esepcially when top managers earn around £2 million a year, including bonuses.
And remember, it's you, the customer, who picks up the tab.
Ultimately, though, fund managers need to make a profit.
In fact they'e making around £10 billion from us every year - and that's regardless of whether or not they manage to produce a profit for us.
Part of the challenge is working out exactly what we are being charged. Investors typically use something called the annual Total Expense Ratio, or TER, to compare the cost of investing in different funds. But, the TER excludes dealing commission, stamp duty and other turnover costs that can add considerably to the expense of investing over time.
So, apart from those hidden charges, what else are we having to pay? More importantly, what sort of impact do charges have on the value of our investments?
And the bad news doesn't stop there. Despite a marked increase in competition, management charges in the UK have been steadily rising over the last ten years.
There are some encouraging signs for consumers. The FSA's Retail Distribution Review will require fund managers to be fairer and more transparent when it comes to charges. In the meantime, investors should be on their guard.
For more videos like this one, visit sensibleinvesting.tv/
All Comments (21)
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I began my investment journey at the age of 38, primarily through hard work and dedication. Now at the age of 42, I am thrilled to share that my passive income exceeded $100k in a single month for the first time. This success reinforces the importance of the advice mentioned earlier. It is not about achieving quick wealth, but rather ensuring long-term financial prosperity
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Once upon a time, I was an eager investor. With high hopes and dreams, I diligently built my investment portfolio over the years. But as the tides of the market turned against me, my once-promising investments began to crumble. Stock prices plummeted, bonds defaulted, and my hopes faded away. With each passing day, my portfolio dwindled, mirroring the sinking feeling in my heart. I watched helplessly as my hard-earned savings vanished, leaving behind a lingering sadness and a stark reminder of the unpredictability of the financial world. I'm here again because I want to get back on track.I need ideas to get on on a recovery process.
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Success with investing starts with this video. As an independent professional money coach in Canada (founder of York Region Money Coaches), passive investing is all I recommend to my clients, and it is all I have done personally for the past 13 years.
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Investing in the stock market is the best option to make a passive income. Virtually all the markets are crazy, most people pay more attention to the shiniest position on the graph, I’m keeping a diversified portfolio.
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Vanguard S and P 500 is my favourite, and best passive investment.
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The moment I realised that predicting the market is pointless was almost an an epiphany to me. It is so simple really that I wonder why it took me so long to figure this out. Actively managed funds with high costs isnt worth it in the long run. Great educational video.
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Watching this in 2021. Its great relevance shows that passive is the way to go forever.
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I was advised to diversify my portfolio among several assets such as stocks and bonds since this can protect my portfolio for retirement. I'm seeking to invest $200K across markets but don't know where to start.
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A father took his son down to the yacht club and said "Look son, those are all the brokers yachts". The son said "Where are their clients boats".
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I appreciate Bogle's honesty and what he's built Vanguard into. That's why I invest almost my entire portfolio in low cost Vanguard index funds.
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I began investing at the age of 33, primarily utilizing my hard work and dedication. Now at the age of 38, I am delighted to share that my passive income exceeded $100k for the first time in a single month. This advice is truly valuable, so don't hesitate to take action. Remember, it's not about achieving wealth quickly, but rather about building wealth consistently and persistently.
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Mr. Bogle said it best: don't look for the needle in the haystack; buy the entire haystack!
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I always remind myself... if some guy came up with an amazing formula to make (say) 20% returns every year - then why would he share this with you? Surely he’s found the holy grail and all he needs to do is borrow as much as he possibly can at interest rates way lower and just invest it himself... and keep reinvesting in his magic formula. He’d get rich pretty quickly without having to bother with clients and all the fiduciary duties that brings. Simple.
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Sir Benjamin Graham said the more steady you stay in stocks the more you will earn in long run. Same is with index funds they stay steady and reverse is Actively Managed Mutual Funds they are moved a lot by managers hence eroding their own profits.
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Buying individual stocks is like buying lottery tickets. Enough said.
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8:18 "The job of the stock brokers is to transfer the wealth of clients to themselves."
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The beauty of index investment is that a normal person can manage it them self's and with some simple mathematics they learn they can understand how they perform against professionals. In my opinion the risk of a good index portfolio managed by an individual is no greater than a bank account because banks are also subject to market conditions.
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Old saying: "Mutual funds are not bought; they're sold."
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Buffett says if you are a full time active investor you should only hold 5-6 stocks...as you can't know 10-20 companies as well as 5-6.....But if you have no interest in stock analysis ALWAYS invest in Low cost Index Funds..he recommends Vanguards.
