Sunday, December 4, 2011

Index Funds: The Best Investment Advice Is Not Always The Most Popular

Mutual fundImage via WikipediaOne of the worst problems an investor has is figuring out how to ride the highs and lows of your portfolios performance. The highs can be exhilarating and the lows are always gut wrenching. There has to be a way to invest that allows you to not worry so much. 


What is the key for staying the course?

At the nytimes.com an article describing  the research of Janet M. Brown, president of DAL Investments, revealed the returns of 306 mutual funds over a 20 year period.  She wanted to see if active management was actually the best way. Brown said, “The overall challenge of mutual fund investing is selecting funds in advance that people think will do well in the future,” Ms. Brown continues. “The easiest thing would be to buy and hold or to select a manager with a good long-term track record and buy it and forget it. That was not an effective way of selecting funds.”

Find more information at The Best Investing Advice? Maybe Not the Conventional Method

Performance.
Mutual funds usually compare their returns to the returns of the S.& P. 500 or the Vanguard S.& P. 500 Index Fund. Strategies that use mutual funds in different combinations to build portfolio's can't produce superior results. But Browns research indicated, over the last two decades, no non-index fund investment strategy dominated. At best, some strategies were only successful for a four to five year period on average. Not one fund beat the benchmark every year.

Investment Management.
You will always find the hot manager of the year making tons of money for their clients. Eventually, all managers under perform the benchmark S&P. No particular investment strategy was successful for the entire period of this research.

Expenses.
All investors usually can agree on the idea that high expenses wear away performance. You can always find some funds with high expenses that have outperformed the index. But you will find they have, on average, returned only 1 percent more than the benchmark S&P 500.

Brown's Best Non-Index Fund Strategy. Brown's best non index fund strategy for using mutual funds surpassed the benchmark S&P 500 with a 12.19 percent return. Yet it underperformed the benchmark 9 out of 20 times. 


Takeaway.
Brown admits that the benchmark S&P 500 index has returned 7.65 percent over the last 20 years. I think most investors would be quite happy with that. There are mutual funds that produce a higher return but they don"t do it consistently. The trouble is finding these great performers on a consistent basis. The bottom line is index funds make the most sense for the average investor.

I have found the best implementation of an index fund centered portfolio is Paul Merrimans "Ultimate Buy and Hold Strategy". It has 11 different asset classes giving a broad, diversified group of index funds that will provide a good return over time. The days of tracking down the so called best funds will be over. You will be able to sit back and know you have done all you can to properly invest your money.


Check out Paul Merriman's Ultimate Buy and Hold Strategy here.

Find all Paul Merriman's great strategy and sample portfolios here.


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