Why are Index Funds the Best Investment Ever?

1. Superior Returns

The table below shows the performance of mutual funds in the U.S. against the various benchmarks listed, such as the S&P 500 (index of the 500 largest U.S. publicly traded companies). The time period covered is over 15 years from 2002 to 2017. All indexes emphatically outperformed almost all mutual funds in the long run. The S&P 500, S&P MidCap 400 and the S&P SmallCap 600 outperformed their respective mutual funds more than 92% of the time over a 15 year period.

Source: American Enterprise Institute

This results of the table above is similar all over the world. Spiva have performed an excellent analysis showing this comparison. Click here to view it.

Over a 1 year period the difference is not as clear between what is superior. This is irrelevant though as investing into the stock market is not a short term investment.

2. Cheaper

There's no manager or analysts to pay. This allows index funds to operate with minimal fees.

The more you pay in investing the less you get. This is because the higher the fees you are charged the more your returns are unnecessarily eaten up.

I have provided a screenshot below of the difference in annual charges on Vanguard’s site. As you can see the “FTSE Global All Cap Index Fund” charges an ongoing fee of 0.23% compared to the “Global Equity Fund” that is actively managed and charges an ongoing fee of 0.48%.

Index Fund

Actively Managed Fund

Some actively managed funds can charge a much higher ongoing fee than just 0.48%, with some exceeding 2% a year. If you had £100,000 invested in a mutual fund charging 2%, that is £2,000 in annual fees a year!

Summary

Investing in the stock market is a long term investment. Don’t let these higher annual fees for mutual funds rack up over the years and eat into your wealth. Don’t let any of these investment professionals fool you either by using complicated terminology or claiming they have the key to beating the market.

Investing into the stock market is simple. Pick a highly diversified global index fund. Contribute to it on a regular basis over your lifetime. Reap the rewards later down the line.

“MOST INVESTORS, BOTH INSTITUTIONAL AND INDIVIDUAL, WILL FIND THAT THE BEST WAY TO OWN COMMON STOCKS IS THROUGH AN INDEX FUND THAT CHARGES MINIMAL FEES. THOSE FOLLOWING THIS PATH ARE SURE TO BEAT THE NET RESULTS (AFTER FEES AND EXPENSES) DELIVERED BY THE GREAT MAJORITY OF INVESTMENT PROFESSIONALS.” – Warren Buffet

If you are still not convinced that index funds are the way to go then check out the video below for advice from Warren Buffet, arguably the greatest investor in recent history who built his wealth from “stock picking”.