Burton Malkiel – one of my thesis advisers at Princeton – has long touted index funds since individual stock movements are are tough to predict and since index funds outperform most actively managed funds.
He details his case in todays’s WSJ editorial “You’re Paying Too Much for Investment Help”
Here’s the essence of Malkiel’s argument …
Over long periods, about two-thirds of active managers are outperformed by the benchmark indexes.
The one-third that may outperform the passive index in one period are generally not the same as in the next period.
In aggregate, actively managed funds of publicly traded securities have consistently underperformed index funds — by roughly the differential in fees charged.
In 1980, the annual expense ratio for all mutual funds (as measured by Lipper Analytic Services) was 66 basis points.
In 2010, the equivalent … the annual expense ratios for actively managed funds rose to 91 basis..
You can’t control what markets can do, but you can control the costs you pay.
investors can benefit from low-cost index funds and their exchange-traded cousins.
The less you pay to the purveyors of investment services, the more there will be for you.
= = = = =
Here’s a link to a rogue summary of Random Walk Down Wall Street