Research by M.I.T. instructor, Mark Kritzman, revealed that even with higher gross returns, actively managed mutual funds and hedge funds, net of all expenses—fees, trading costs and taxes—leave less in your pocket than a simple index fund.
Q: I heard an investment joke the other day, and it seems to be a valid critique of index fund investing. I’d like your response. The joke goes something like this, “A stock picker and an index fund investor are walking down the street. The stock picker suddenly stops, points to the sidewalk below, and says ‘Hey, look, there’s a $20 bill.’ As he bends over to scoop up the found money, the index investor says, ‘Don’t bother. If that were a real $20 bill, someone would have picked it up already.’” What is your response?
Morningstar, known for its star rating system, recently conducted a study and found the strongest predictor of a mutual fund’s future performance isn’t it’s star rating, but something completely unexpected.
Q: When the market goes down, index funds will go down right along with it. Shouldn’t we look to active managers to protect us during a downturn?