Investing Smart

Posts Tagged ‘index-funds’

Question: What type return should be expected from a managed mutual fund portfolio relative to a comparative index?

Not even sure the question makes sense and have a limited knowledge of How Investments Work. My quarterly statement from an account with an investment advisor shows my rate of return in a diversified mutual fund portfolio for a 5 year period and it’s always lower than a comparative index. 5 points lower for the current year and less than one for the 5 year period. Net of 12.94 for the 5 years is good but should I be getting better from the advisor? Question may be too vague to answer but wanted thoughts from those more knowledgable on investing. Thank you.

Answer: OK, the general principle is that you will underperform the index by the amount of fees you are paying. But because fund returns go up and down and some funds are lucky and some unlucky, that is only a general principle.

This is why index funds are great. They are low-cost and tax efficient and underperform the market by their expense ratio (internal management fees). Over time, 80% of managed funds underperform the companion index fund. If you didn’t pay loads or a higher expense ratio or 12b-1 fees, that number would be much different.

Here’s a shocking example. I was comparing returns for a VUL – which is a high expense insurance police and also an investment (has mutual funds in it).

I compared the return on the S & P 500 fund in the VUL to the Vanguard S & P 500 fund – apples to apples, except for the fees.

The return on VUL S&P 500 Index Fund2: 6.85%
Vanguard’s S & P 500 Index fund: 11.77% !!!!!!!!

THIS is what fees do to returns. Yes, some high cost funds will beat their index, but almost always not consistantly.

So, you need to find out what your fees are. ALL the fees. I suggest you use Morningstar.

Also, you need to read this:

http://www.bankrate.com/brm/news/BoomerBucks/20061206_investment_advice_a1.asp

http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm

The more I learn, the more certain I am that the financial advising industry is a sham.

Very good question.

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