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If You Are Playing Beat the Benchmark, Don't Expect to Win

Updated on December 18, 2012

Index Investing versus Active Investing

IF YOU'RE PLAYING "BEAT THE BENCHMARK," DON'T EXPECT TO WIN

Very few mutual funds are able to beat the indexes year-in year-out. The list of index-beating funds changes each year. Moreover, most actively managed funds charge a load fee upon purchase and high management fees, and as a result of frequent trading, they generate taxable income in non-IRA accounts. For most investors low-cost, tax efficient index funds such as those offered by Vanguard are the best bet. Two good books on investing are:

Winning the Loser's Game" by Charles Ellis and

Unconventional Success--A Fundamental Approach to Personal Investing by David B. Swensen.

Ellis advises mutual funds and pension funds, and Swenson is a professor of finance and economics at Yale University and chief investment officer of Yale's investments where he compiled a quite successful record for many years. Ellis and Swensen advocate for ordinary investors a balanced portfolio of several no-load, low cost, tax efficient index mutual funds like those offered by Vanguard.

Another reason that for most folks, trying to pick winners among stocks or mutual funds is that insider trading is much more common than most people realize. This means that when you try to pick winners you can be likened to starting a 100-yard race 10 yards behind the insiders.


http://www.yalealumnimagazine.com/issues/2005_07/swensen.html

N.Y. Times financial columnist Paul J. Lim points out that only a minority of actively managed mutual funds beat the broad S & P 500 benchmark.

Year..........................% Funds that Beat the S&P 500

2000...............................................62%

2001................................................41

2002................................................39

2003................................................36

2004................................................38

2005................................................28.5

http://www.nytimes.com/2006/10/29/business/yourmoney/29fund.html

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