It’s no secret index fund investors tend to have better results than their managed fund counterparts. Finding an investment strategy more rewarding than index investing is very difficult.
Many try. Few succeed. That’s why the data from the Investment Company Institute shows a regular flow of money out of managed funds and into index funds.
But what if you want to “hit it big?” You’ll need to take on a lot more risk. That’s the only way to find the proverbial golden goose. But even when a high risk/high reward investment pays off, it adds volatility to the portfolio. The gain isn’t “free” money. If the return averages match the more steady returns of indexes, the actual money made can be significantly lower. The most successful fund manager can’t justify the damage a single bad year can cause. Chasing the latest high returns doesn’t pay off, a reality that is demonstrated year after year after year.
But this is old news. You already knew that index investors generally do better than managed investors. But what if I told you index investors may even outperform their own fund averages. That may lift an eyebrow.
Does this mean index fund investors are smarter? It depends on your definition of smart. But if discipline is part of that definition, then yes, they are.
The most disciplined of the group may just be the investors in the Vanguard retirement date portfolios. Not only do they outperform their managed fund friends, they outperform their own funds. Setting the fund on autopilot with automatic monthly investments captures the buy-low-sell-high spirit, without ever having to make a good “call.” And the annual rebalance modulates the risk/return pendulum in both directions.
The math, it turns out, almost always favors the index investor.