Index Mutual Funds and ETF’s- the argument for passive investing

Recently, there are more and more investors advocating for low-cost index mutual funds and ETF’s. People argue that most managers spending all this time doing all the research rarely beat the market. When I refer to beating the market, it is common that most managers will have a benchmark such as the S&P 500 that they are trying to outperform and earn superior returns.

The thing is most of them don’t beat the market. And even if they do, a lot of the time you are still worse off because you end up paying for 2 or 3% of your return in management expense ratios. For the know-nothing investor, index funds are a great way to get into investing. It provides them with easy access to diversification and the market with low levels of risk and a chance for good returns. For example, the return of the S and P 500 since its inception in 1928 is 10%. Although, you should not get confused and think that you will just put money in and receive a 10% return because it is no longer that easy these days but it is a good starting point.

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For an experienced investor, I’d like to point something out in the words of Warren Buffett. He says if you can understand valuations and find two or three very solid companies with a competitive advantage then why would you invest into your 20th or 30th or even 100th choice? (if you were investing in an index). If you understand the markets well and can pick superior companies you are better off doing that. If not stick to index funds and ETF’s! ETF’s are much like index mutual funds but have even lower management expense ratios- as low as .005%.

Summary: Low-cost index mutual funds and ETF’s are a great option for know-nothing investors. If you understand investing well you are better off picking superior companies with a competitive advantage.

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