When people talk about investing in stocks, for some that might mean buying individual stocks. Doing active research on specific companies, and buying shares of some that you believe are a good value, has been a way that many people have approached stock picking and investing. Of course, some people did away with the research aspect and bought on gut feeling, or some other “methodology”. Everybody is an expert, right?
Well, not really. That includes me, in terms of picking individual stocks. This is why I think funds can be a great choice for many people. The thing is, not all funds are created equally, and not all of them offer the same risk and reward profile. Furthermore, some involve more costs than others!
Here’s the thing: quite often, index funds – which really don’t involve much active stock picking – outperform actively managed funds. It’s interesting that funds that have professionals managing them can actually have lower net returns at times than those that are simply index funds, but that’s often the case! Whether large, mid, or small cap – the appropriate S&P benchmark basket can very often outperform such actively managed funds.
When taking the manager out of the equation, you’re taking subjectivity and emotion out as well, to a large degree. After all, how could these aspects be present in an index? The big thing is paying quite a bit less in terms of fees. We can’t forget that fees impact total return!
Thing gets me thinking: why would people buy actively managed funds, given the quality performance of index funds in comparison? Is it the idea that one could obtain potentially higher returns than with index funds, without the perceived risk of buying a small group of individual stocks? Or, is it simply the notion that an “expertly” managed fund should naturally outperform an index fund that someone passively holds. After all, “active” is seen as better than “passive” in our society, on many levels.
I’m not a professional or advisor, but can say that I tend to prefer index funds over actively managed funds.
My Questions for You
Do you focus on funds, or individual stocks?
If funds, do you prefer actively managed funds or index funds? I’m interested in the reasons behind your preferences.