Indexing the best choice for investors large and small

WMIA Opinion

Posted on March 10th, 2017 at 9:23 AM by WMIA

Recently this week Morningstar published an article about Warren Buffet's views on index funds versus hedge funds or actively managed funds. For those of us whom don't know who Warren is this link here tells his story. A summary on Warren is that he is an American, who is considered one of the most successful investors in the last 20 years, a business magnate and philanthropist whom is worth a whopping $79.5billion.

Here at WMIA we love index funds, many of you will know that the investments we use are exchange traded funds which offer investors a low cost diversified expsoure to an index, whether it be the Australian share market, international share market or property.

In the morningstar article it makes mention of one important argument Buffet wrote in his recent letter to his shareholders. Buffett's argument for indexing boils down to what he calls a simple equation:

"If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win."

An example of this would be putting all your funds in an actively managed fund. This fund buys and sells investments constantly in order to outperform the market and achieve a superior return. The management costs for being in such an investment maybe 1% to 3%. We then compare this to an index fund(ETF) it provides the investor with exposure to the entire market, the fund manager does not buy and sell constantly therefore not passing on these costs to the investors. Yes the index fund manager may make slight changes in the allocations but nothing dramatic. The management costs for this sort of investment is only a fraction of the cost and usually range from 0.12% to 0.35%.

So what does this mean for your super?

Well when investors are in the same market and they are effected in the same way, the one thing that advisers can ensure is that they try and reduce the management costs of the investments. At present the management costs depending on your invesment option range from 0.17% to 0.35%.

For those of you whom love a good read about investing see the full article from morningstar here.

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