Mutual Funds vs. Index Funds.

[clatoden99]

How come people still invest their money in active mutual funds, it is academically proven that on the long run most investors can't outperform the market, so why not investing in index fund instead of paying high percentage to the fund management ?

[disneysteve]

How come people still invest their money in active mutual funds, it is academically proven that on the long run most investors can't outperform the market, so why not investing in index fund instead of paying high percentage to the fund management ?

So basically you want to know why everyone doesn't always do the statistically best thing with their money.

Obviously, a big part of the answer is that people just don't always do the right thing. People like to think they can do better. People like to look for that edge. You could also ask why would anyone buy individual stocks instead of index funds (which are mutual funds by the way so your thread title is a bit confusing).

Another smaller part of the answer is that there are some excellent actively managed funds out there. One of my main holdings is Vanguard Healthcare Fund. It is one of the top performing funds ever. Since inception in 1984, it has had an average annual return of 16.84%. That blows away most index funds.

I see nothing wrong with building a solid foundation to your portfolio with index funds but reaching with a portion of your money with active funds or individual stocks.

[FLA]

IDK why, I am much happier with my investment profile since I switched totally to Vanguard Index funds. I can't justify actively managed fund fees

[amarowsky]

I very recently switched most of my investments to index funds. Basically the 3 fund simple portfolio. Too soon to really notice a difference. Bogle heads pretty much provided too good of an argument to go with any other simplified strategy. The massive diversification does make me feel much more comfortable against current and future volatility. Low fees are a huge plus too considering how long I will be holding onto these before considering drawing from them (31-40 years from now).

[sv2007]

this may be interesting read:

http://www.cnbc.com/2016/02/16/warren-buffett-slips-but-still-winning-epic-hedge-fund-bet.html

[sv2007]

IDK why, I am much happier with my investment profile since I switched totally to Vanguard Index funds. I can't justify actively managed fund fees

It's hard to beat an index like S&P500 so I think you did a good move. Plus Vanguard seems to have a reputation for low expense ratios.

[Petunia 100]

I think the answer to this question is as simple as: because most people don't know how to go about buying any fund which is not sold to them. People largely rely on an "expert" at the bank, or a full-service brokerage, or even an insurance agent.

[dczech09]

I cannot speak for others, but I can speak for myself (and this may also explain the actions of some others).

I personally prefer mutual funds. Don't get me wrong: I get that most active mutual funds do not beat the market long-term and that the costs of mutual funds can be quite a bit higher. However, you cannot just look at general history or costs to make a decision. You have to look at the whole picture.

I review my investments once ever year and for my IRA provider (T Rowe Price) and my 401k provider (Fidelity), I have found that their mutual funds tend to have historical performances that clobber their index funds. Also, the costs (while higher than indexes) are still low enough to justify.

For example, I found a mutual fund with a historical performance of about 15% per year, with an expense ratio of 1.15%. Conversely, I found an index fund with a historical performance of about 8%, with an expense ratio of 0.15%. Sure, the index fund is much cheaper, but the additional return that I am (hopefully) getting on the mutual fund vastly outweighs the additional cost.

Historical returns are not indicative of the future by any means, but they are the best indicator available. If I find a mutual fund with a 50 year track record, I can be pretty confident in it.

I believe that people ought to consider what experts say. For example, Vangard's founder John Bogle is well known for saying on record that the typical mutual fund underperforms and overcharges. However, in addition to considering expert advice, we should also know how to make decisions for ourselves. And in this case, I am willing to pay a higher cost for a higher return. After all, a superior product ought to be sold at a higher price.

Typically, I do not like mutual funds that charge in excess of 1% per year and I usually recommend investors to steer clear. However, there are exceptions to rules.

If at some point in the future index funds outperform mutual funds, then I will absolutely buy index funds and take advantage of the lower costs. But right now, I am just not seeing it in my situation. It could certainly be different for other people.

At the end of the day, you need to look at your investment options and make a decision based on what the numbers tell you. Numbers don't lie.

[sv2007]

For example, I found a mutual fund with a historical performance of about 15% per year, with an expense ratio of 1.15%. Conversely, I found an index fund with a historical performance of about 8%, with an expense ratio of 0.15%. Sure, the index fund is much cheaper, but the additional return that I am (hopefully) getting on the mutual fund vastly outweighs the additional cost.

Would you please share the fund info?

[Petunia 100]

Historical returns are not indicative of the future by any means, but they are the best indicator available. If I find a mutual fund with a 50 year track record, I can be pretty confident in it.

What is this opinion based on?

[corn18]

I have become a boglehead and now greatly enjoy the lack of anxiety. Stupid simple and fits me well for my retirement investments.

https://www.bogleheads.org/wiki/Getting_started

[Jluke]

I have become a boglehead and now greatly enjoy the lack of anxiety. Stupid simple and fits me well for my retirement investments.

What approach are you taking - 3 fund, 4 fund, lazy, target fund, other?

[corn18]

I try to replicate a 3 fund with no tilt right now. 60/40 with 10% international. I may add REITS this year to get some different exposure. My 401k has Spartan funds with a 0.16% ER, so those are nice. I also use Spartan funds in my Roth IRA's (all bonds) and my taxable accounts (Total US and Total International). Set and forget. I love it.

[ygrey]

For most people, Mutual funds is just another investment option across the various security options that are available there.

[dczech09]

What is this opinion based on?

A lot of people say "historical performance is not indicative of future results." This is very true. Future results are never guaranteed and it would be foolish to believe that historical performance alone is a good judge of what will happen going forward.

With that being said, no one can predict the future with certainty or accuracy. At least not consistently. Nobody knows for sure what tomorrow will bring, especially when it comes to investments. Not even mutual fund managers.

However, if I am looking at a mutual fund that has a 50 year track record of 15% annual returns, I can be pretty confident that that track record may continue going forward. I am much more confident with that mutual fund than a mutual fund with a 10 year track record of 3% annual returns.

Think of it this way. Let's say that you go to a doctor's office and have the choice between two doctors: one who is right 95% of the time, and one who is right 75% of the time. Which would you choose? Probably the 95% doc. There is no certainty that you will have no issues with the doctor, but historical performance is a great indicator (and may be the only one that you have).

Perhaps that is a bad analogy. The point is that experience breeds confidence. And historical performance is experience.