Actively managed vs. indexed mutual funds – Why I use a passive approach to investing

Actively managed vs. indexed mutual funds – Why I use a passive approach to investing

I’ve just finished listening to a webinar session led by Rick Ferri, who offers low cost passive investment management at his firm, Portfolio Solutions (www.PortfolioSolutions.com).  Rick has been at nearly every Garrett Planning Network retreat that I’ve attended, and I’m always impressed with his passion and knowledge about investments. This particular webinar is titled “The Death of ‘Buy & Hold’ Has Been Greatly Exaggerated”.  Rick summarized the findings in his most recent book, “The Power of Passive Investing”.  Rick talked about 2 types of active management – active management through using actively managed mutual funds, and active management through tactical allocation (a.k.a., market timing). Actively managed mutual funds vs. indexed funds Rather than the usual focus on fees, he shows that across most asset classes, two thirds of actively managed mutual funds underperform the index.   (Which means, most would underperform a low-cost index fund, just by a bit less.)  Similar findings are found in past studies, and can be seen to some extent in the S&P Indices Versus Active Funds Scorecard, available at the Standard and Poor’s website (http://www.standardandpoors.com/indices/spiva/en/us). Market timing Can you pick the best day to get into and out of the market, or a sector, or a geographic area?  Books on behavioral economics tell us that we want to believe that it’s possible to foresee changes in the market, and that we can be successful doing so.  However, evidence typically refutes our impressions, and Rick presents some interesting evidence about tactical allocation.  For example, he showed a “buy and hold” vs. tactical allocation strategy for the years 2000-2010.  The “buy and hold” – with no rebalancing,...
New Year’s Resolutions

New Year’s Resolutions

While you’re contemplating your New Year’s Resolutions for 2011, I hope you can identify something simple that might improve each area of your life, including the financial/money area.  Here are some quick things to do on the financial side that can make a difference: 1)      Review your spending plan:  Are you on track with your spending plan?  Do you have one?  If you think you’d benefit from using a spending plan (and most people would), don’t get stuck on the idea that you need to go BACK in time. Start tracking your actual spending in January and February, then set up a time in March to review what you spend and set up a plan.  Pick one area that’s important to you:  Do you give the kids money whenever they ask?  If so, track that area over the next 2 months and decide if you might be more disciplined by using another approach.  Do you eat out – a lot?  Set a goal for the number of times per week you’ll eat out, and track your savings.  Most people have one or two areas where they can save simply by adding some focus.  Find that area, pay attention to it, and set a goal! 2)      Increase your savings:  For pre-retirees who are still adding to savings, give your savings rate a boost.   Maybe you’ve set aside 5% of your salary every year for the last 5 years.  This year, commit to raising that percentage, even if it’s by one percentage point.  If you save an additional $600 per year for 20 years at 6% interest, that’s an additional $22,000....