If you've been visiting The Motley Fool for a while, you know that we've long recommended index funds for most investors. Heck, even superinvestor (and super-philanthropist) Warren Buffett has recommended them. He had this to say in his 1996 letter to shareholders: "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."
Before I go any further, let me introduce you to a few excellent index funds with low fees:
- Vanguard 500 Index (based on the S&P 500 index).
- Vanguard Total Stock Market Index (based on the total market)..
- Fidelity Spartan 500 Index.
- Fidelity Spartan Total Market Index.
Investing in these funds will give you approximately the market's return, which has averaged about 10% per year over many decades, though it may well be 6%, or 12%, or something else over your personal investing time frame.
On our Berkshire Hathaway discussion board several years ago, a very enlightening discussion ensued from a post titled "In Praise of Active Management" by Fool community member UsuallyReasonabl. This respected member of our online community is now involved in actively managing money, as are some others on the board, so perhaps he's not the most objective opiner. But he's still a smart and insightful guy, so here's a recap of some reasons he offered for opting to use the services of professional money managers.
- "The first, and most important, is time. It requires an enormous expenditure of time to become a truly successful investor. ... While I agree that it is best to make fewer, better investments, and to swing hard when you get the fattest of fat pitches, and then to [sit around] and wait, those promoting this philosophy always seem to forget to mention the gigantic investment in time and education required to get to the point where the investor can, with confidence, discern those excellent opportunities and take advantage of them."
- "Another reason I decided to put my money in someone else's hands is the low cost of doing so. Efficient markets exist even in money management. While there are those who, not entirely without reason, decry the 1% to 1.5% fees charged by money managers as placing too large a drag on returns over long periods of time, I suspect that those people do not stop and place a value on their own time. ... If an investor values his time at, say, $50 an hour, and he is spending 150 hours a year [that's just three hours per week] reading annual reports, 10-Ks, and the like, he is 'spending' $7,500 managing his investments. On an investment portfolio of $250,000, that is a 3% hit. Is it really the case that such an investor would not be better off paying a trained professional $2,500 to do the same thing? More importantly, it is not difficult to conclude that someone spending his full time and energy attempting to make money in the stock market, and having the intellect and stamina required to do the job properly, is probably going to earn 1% to 1.5% more than someone doing it as a hobby, part-time. So I suspect the manager will pay for himself."
- "There is a strong emotional component to investing. When it is your own money at stake, doing the work of investigating companies and making investments can be quite grueling, and the emotional involvement can make it difficult to be clear-headed about the work in a number of ways. There is a tendency to fall in love with a company that you've spent hours researching -- after all, you don't want to have wasted all of that time. There is the difficulty in selling losing positions -- after all, you don't want to admit you're wrong."
He made many other good points, as did those who responded to him.
So what's your take on all of this? Do you prefer to manage your own money completely, or might it make sense to let the pros handle at least some of it? Some of the money managers that UsusallyReasonabl mentioned in his original post have minimum investment requirements in the tens or hundreds of thousands of dollars. In other words, they're not for me -- and maybe not for you, either.
But there is a kind of professional money manager whom we can tap -- mutual fund managers. We simply need to select carefully, since the majority of mutual funds don't perform as well as the overall market and simple index funds do. We have to pick managers who stand head and shoulders above the rest. Trust me -- these folks do exist, and some of their long-term average annual returns would shame solid stock performers. You may well earn 15% or 20% per year, on average, with some terrific funds.
Let us guide you
If you're looking for market-beating funds with great managers, low fees, and top-notch track records, we can introduce you to some via our Motley Fool Champion Funds newsletter. Start up a free trial, and see which funds analyst Shannon Zimmerman is recommending and has recommended -- and why.
Check out just one of his recommendations. It's a global value fund with a five-year average annual return of 15.75%, and it's up more than 10% since being recommended back in November. Its top holdings include Marathon Oil
Learn more in these Zimmerman articles:
SelenaMaranjian's favorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Berkshire Hathaway. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.