"Most investors, both institutional and individual, will find that the best way to own common stocks ("shares") is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals." - Warren Buffett, Berkshire Hathaway letter to shareholders 1996

So what is an index fund? It is an investment fund that is managed to track a particular sharemarket index, and so provide a very similar return that would be achieved from an investment in every company that is represented in the index.

An index fund is considered a passive fund, which differs from an actively managed fund that attempts to outperform the index. However, active funds employ teams of highly-paid analysts in their pursuit of outperforming their particular index, and as a consequence the fees that are paid out of investor’s funds are much higher.

Active management fees range from 1 - 2% pa of the capital that you invest, and a further 2 - 4% in commission is paid to the Financial Planner who helps you get into them. This means that you would need to earn a return of at least 3 – 6% on your funds in the first year just to break even!

The question that arises is whether you are receiving true value, or indeed a better return on your investment, from paying these extra charges in an actively managed fund?

Research has shown that less than 20% of fund managers will outperform the overall market in any given year, and those top-performing fund managers are not the same from year to year. Therefore investing in one of last years winners makes it unlikely that they will outperform the market again this year or next.

It is therefore almost impossible to consistently beat the index. Warren Buffett has said: "Cheap tracker funds will beat most managed funds over the long term."

So if managed funds don’t regularly outperform the index, why not go straight to the source and buy an index fund direct? Here are some good reasons to buy an index fund:

• It takes the pressure off your expectations – slow and steady proves itself time and time again
• It’s cheaper to invest, it costs you just 0.3% of your invested capital or less in some cases
• Takes the stress out making individual investment decisions
• You can invest in them without having to go through a financial planner
• Index funds deliver better returns than most actively managed funds

Paying unnecessary fees for no additional benefit is not a good strategy in anyone’s book. These fees come out of your capital before your funds are invested. Why pay for expertise when there is not a long term consistent result. Reducing the drain of fees on your investment capital will have a compounding effect over the long term, making a difference of tens or hundreds of thousands of dollars in your retirement capital.

Page 1 of 2 :: First | Last :: Prev | 1 2 | Next