This episode of the Finance Flash Go podcast is all about active versus passive investing. Which is best?
Actively managed accounts underperform passively managed funds 80% of the time. And, there is no way to predict ahead of time which actively managed funds will be in the 20%. Your advisor thinks she is smarter than the rest and can beat the 80%. She can’t.
What about my portfolio, you ask?
My stock portfolio is comprised of passively managed index funds that are designed to approximate the market average, not chase waterfalls. So, I’ll take an 80% chance versus 20% any day of the week.
Further, fees in actively managed funds are going to kill you. There’s a saying in Wall Street: “In investing, the goal is for the investor, the advisor, and the brokerage to win. But, two out of three ain’t bad.” Guess who they’re leaving out of this equation?
Your advisor wants to get paid. They get paid based on how actively they manage your investments. So, each move is made using their extensive knowledge and training and you must pay for that expertise. Even if it loses 80% of the time…that’s equivalent to hitting below the Mendoza line for all the baseball fans out there. Most advisors charge an AUM (Accounts Under Management) fee, usually 1%. Doesn’t seem like much. Until you realize that your 8% yield just became 7%. Over an investor’s career, that’s equal to hundreds of thousands of dollars.
If you are looking for a winning formula, take 20% of your income as savings and invest it passively in broadly diversified, low cost index funds.
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