(03) 9020 2905“Come closer, my sweet. I only share the following with special people. I have a crystal ball that tells the future of investment! If you become a client, I will share its secrets with you!”
Sounds like codswallop? Would you believe that if someone said that to your face? Would you guffaw and walk off?
Investors are told that every day. By most fund managers, by most super funds, and by most advisers. Not all, but most.
That is the claim of active fund managers: They know the future and can act on it, because their crystal ball works. Put your money with them and they will “do better than the others”.
However … for every 10 managers (though there are hundreds), what are the maths? Five will be above average and five will be below, before fees. Duh! That’s how averages are made. Do the below average ones drop their fees? No.
Index funds don’t claim they will beat anything. They will roughly equal – within a poofteenth of a per cent – particular markets. Why? Because they buy the market.
The relative costs? The average “active” managed fund for Australian shares costs about 1 per cent, versus 0.2 per cent for index funds. Correct. Index fund fees are 80 per cent cheaper.
Active managers, therefore, need to beat index funds by 0.8 per cent a year to justify their costs. Every year.
Over longer periods, I don’t buy the active managers spiel. Some fund managers, perhaps, sometimes. But who’s going to consistently pick the genius managers? You’ll never, ever hear me utter that first paragraph. Utter bulltish.
Bruce Brammall is the principal adviser with Castellan Financial Consulting (www.castellanfinancial.com.au) and author of Debt Man Walking.