Extolling virtues of passive investments

Lifetime staff found themselves nodding their heads in agreement after reading a blog in The Economist – which extolled the virtues of passive investments.

The feature kicks off with the words: “Everyone knows that if you go to a casino, the odds are rigged in favour of the house. But people still dream of making a killing. The same psychology seems to apply to fund management, where investors flock to high-cost manual funds even though the odds are against them.”

A stockmarket index reflects the performance of the average investor, before costs. Given that the costs of active fund-management are higher than those of tracker funds, the average active investor must underperform his passive counterpart.

And many do not realise just how substantial the costs can be.

In an article in the latest Financial Analysts Journal (FAJ), Jack Bogle of Vanguard, a fund-management group that specialises in index-tracking, looked at the sums and came down in favour of passive investment.

He stated that the annual gap between the expense ratio cited by the average large-stock mutual fund, and Vanguard’s index fund, is 1.06 percentage points. That comes mostly in the form of investment-management fees.

In a previous FAJ article, Bill Sharpe, a Nobel laureate for economics, calculated that someone who saved via a low-cost fund would have a standard of living in retirement some 20% higher than someone who saved in a high-cost fund.

That calculation was made using the impact of investment-management fees alone.

Here at Lifetime we are wedded to the belief that a passive investment philosophy is the best way to help our clients achieve their investment goals.

Passive investing involves choosing assets that best suit the risk you need to take over a particular time scale and selecting a portfolio of index tracking funds that match your needs.

  • Passive funds do not have the high costs of Managed or Single Fund Managers.
  • Passive funds reinvest dividends back into the plan rather than sacrificing them in order to chase performance.
  • Passive funds do not incur unnecessary charges caused by switching.

We are not looking to buy the needle in the haystack (i.e. the fund which can outperform an Index), our philosophy is to buy the whole haystack.

For the full ‘Against the odds’ story from The Economist log on to: http://www.economist.com/news/finance-and-economics/21596965-costs-actively-managed-funds-are-higher-most-investors-realise-against