Passive Index Funds: The Facts And Fallacies

For many decades, Warren Buffett, one of the world’s richest men, has invested in entities that have gone on to record unprecedented success. He is also a vociferous activist on the necessity of investing and saving for retirement.

In the current market, the majority of funds are exorbitant for no apparent reason. For this reason, Warren Buffett has been advocating for investors to take upon cheaper investments that last for a longer time. Warren’s yearly publication is full of expert advice, and I beg to add my point of view.

The majority of mutual funds have average returns due to high maintenance costs and excessive trading. Also, passive index investments come with numerous risks. For these reasons, clients should be cautious while determining the suitable product. It is advisable that they choose options that offer long-term returns at affordable costs.

Moreover, the perception that passive index returns guarantee a pleasant life after retiring is proving to be a fallacy. Index funds are not immune to market downturns. In a recent online survey, 50% of more than 1200 investors revealed that the funds expose them to losses when markets crash.

While most funds have had mediocre performances over time, Warren notes that not all funds are bad apples. Some, like the S&P 500 index fund, have excelled. However, the question is how investors can identify the resources which will ensure profitable returns. According to research, the two metrics that should be considered are low costs and high manager proprietorship. Managers who invest in their funds usually record excellent performances that surpass market averages.

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About Tim Armour

Tim is the CEO and Chairman of the Los Angeles-based investment giant, Capital Group. He acquired an undergraduate degree in Economics from the Middlebury College. Armour boasts of vast experience in the investments industry, spanning over three decades.

He was named the chairman of Capital Group in 2015. Before that, he had worked for various prominent firms in the investments sector.