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Are Index Mutual Funds the Be-All and End-All of Investing

Posted by Mr. Hachis | On: Jan 01 2013

How important are index mutual funds as an investment opportunity?
Well, here's a little example that might illustrate that.

Google has been a publicly traded company for only 8 years now. When they first planned to put out its IPO in the yeas 2004, the management realized that many of their employees would now be rolling in the green, as soon as they were given stock options. They didn't want to see their employees blow their money on unwise investments.

And so, they brought in Nobel Prize winning economist Bill Sharpe to try to talk some sense to thHem. And you know what he told them? You're probably guessing correctly now. H asked them to put their money in index mutual funds instead of trying to play the stock market and trying to beat it.

In fact, the "Don't even try to beat the market" adage is a theme that you see everywhere that you read about investment advice. They tell you repeatedly you are never to believe anyone who tells you that you can actually beat the market. Not even if it's a high paid stockbroker or a magazine that publishes hot tips.

Once you learn, accept and internalize that you just cannot beat the market, the world suddenly becomes very clear. All these mutual funds out there that are actively managed and that are run by high-paid managers, don't really end up doing anything for you. Four out of five times, mutual fund managers fail to secure the mutual funds there directing to any real profitability. They fail to even beat the indexes four out of five times.

In other words, index mutual funds that follow good indexes, win four times as often as actively managed mutual funds. If you go with index mutual funds, you pay practically nothing towards management fees. If you go with regular mutual funds, for failing four out of five times, they charge you 1% at least.

There is simply no reason to do this kind of thing when you understand that there is no beating the market. At least not in a consistent way. For people who don't live and breathe stocks and you don't wish to take big bets with their money, it's breathtakingly easy to get rich.

Anyone who is willing to wait and take it slowly only has to invest in index mutual funds, and go home and wait. That's all that needs be done. The whole playing the stock market thing just isn't needed.

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1 Comment

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