Warren Buffett advocates index funds for most investors

Why would one of the richest men in the world make this statement time and time again? Because over the long term most fund managers tend to be pretty poor at trying to pick stocks and subsequently underperform markets. Plus, they are expensive. He is so confident on this fact that in 2007 he bet a collection of hedge fund managers $1 million that a US index fund return over 10 years would beat all of them. He won and donated the money to a charity called Girls Inc.

Below are the latest findings of the Spiva Report: 78.52% of US-based active fund managers underperform the market after five years. Closer to home in Australia, that number is 80.79%, in Europe, it’s 77.53%1.

 

Considering investors can access index returns for extremely low management costs, why would anyone bother trying to pick those managers who beat markets, only to have a very high probability that they will get one that underperforms.

After 20 years of educating our clients on the benefits of capturing market returns at a low cost, it is interesting to see that the world has finally caught on. Over the past 12 months, fund inflows into low-cost index investments exceeded the inflows of actively managed investments for the first time.

1https://us.spindices.com/spiva/#/reports

Stephen Lowry (CFP Professional, DFP, FAIM, AIF) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

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