YMM Reading List

Thursday, December 3, 2009

Academic Research Suggests You're Paying Your Fund Managers Too Much

A very interesting report on Marketwatch.com reports that index funds beat actively managed mutual funds 97% of the time. This is counter to what some financial planning experts, such as Ray Lucia (of whom I am a huge fan) have said. Mr. Lucia said in a recent broadcast of his syndicated "Ray Lucia Show" that in turbulent times like this, actively managed funds will beat the indexes because of the skill of the fund managers. Unfortunately it's just plain tough to pick a fund manager who's right enough of the time to beat the broader indexes. The other factor is the expense of using mutual funds. Even no-load funds have fees equal to 1% or more of assets invested. Compare this with index funds where the fees are less than 0.3%, and the actively managed funds are already lagging behind index funds. Now try Exchange Traded funds where the cost can be less than 0.17% (plus brokerage fees of course) and you're really swimming up stream with your mutual funds.

Does all this mean that I'm firing all my fund managers? Absolutely not, but for those who argue that the TSP is not a great option because you're linked to broad indexes instead of actively managed mutual funds, this study helps provide a counter-argument.

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