The majority of investors blindly follow the “conventional wisdom” and the easiest path to investing. This usually includes placing their money into a 401k and or mutual funds in their IRA. They either don’t know there is a better alternative or worse, they don’t care.
Morningstar reports the average mutual fund returns for the past few years. At face value they seem as though they are doing their job in increasing your funds for retirement. But just compare the returns to that of the market itself and you see where you will be falling short of your financial goals.
Morningstar also reported that in March 2014, investors added $39 billion to equity funds. Looking at the S&P 500 as a benchmark, if you simply invested in the market itself, you would have had returns of 45.5% over the past three years. Clearly the fund managers are not doing better than you could yourself!
Paraphrasing Warren Buffet, he once said the best way for an individual investor to be involved in the market is with an index fund. An index fund is one that mirrors the broad market index and usually has lower fees. While this is probably good advice, it doesn’t address the issue of avoiding large market crashes like we experienced in 2000 and 2008. Many people fear that it is not an issue of “if” but rather when it will happen again.
There is also the issue of flexibility. When you are investing in a fund, you generally can only redeem, (sell) your shares after the market has closed. When you are trying to time entries and exits, this can reduce returns. So an alternative is the use of ETF’s in your retirement accounts. An ETF is a passively managed basket of stocks in which you buy shares of the basket. It mimics the underlying index but allows an investor to enter or exit the fund whenever the market is open.
For instance, the SPY, (the ETF that tracks the S&P 500 index) returned over 55% in the past three years.
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