Risks of Fund Managers
Fund managers are subjected to human error and human emotions. Their job is to outperform the market, so they often have to take market risks to achieve good returns.
This risk is completely removed with index funds. There is no real risk of human error with an index fund manager, at least regarding stock selection. Investments in the fund are not selected by a single person. Instead, the investments are based on a collection of investments that perform well. Even an active fund manager able to avoid human emotions and mistakes cannot overcome the unpredictable nature of the market.
Management Costs
It takes time and skill to create an investment fund. Companies offering mutual funds to the public need to pay the wages of these fund managers for their time and expertise. Because index funds are managed passively, their management cost is expressed as an expense ratio, meaning the cost of managing these funds is very low compared to funds designed to outperform market averages.
In 2020, the expense ratios for index funds were about 0.06%, while active mutual fund expenses averaged around 0.71% or higher. This means that an investor in an index fund can start each year with a 0.67% advantage over active funds.
Trends
Index funds, especially the best S&P 500 index funds, maintain large numbers of investors and high levels of invested assets. They do not have sudden peaks or valleys in popularity or trends. This is the strength of index funds.
In contrast, many actively managed mutual funds become popular because the fund manager has outperformed the market for more than a few years. As more and more investors become aware of the positive trend, the mutual fund attracts more assets in the form of investor money.
Time Savings
One of the main ideas behind investing in all types of mutual funds is to simplify investing and make it more accessible to the average or new investor, but selecting the best mutual funds can be time-consuming.
Investing in index funds means you won’t spend a lot of time and effort researching funds and managing your portfolio. You put your money on autopilot, which removes worry and frees up your time for more important endeavors.
Passive investing is easier and less stressful. This approach reduces the time and effort investors spend selecting where to put their money. Fund managers come with additional fees and come with human error risks. Investors see index funds as more stable. Actively managed funds are more likely to see changes according to trends.
The Balance does not provide tax, investment, financial, or advice. The information is provided without regard to the investment goals, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
Source: https://www.thebalancemoney.com/why-index-funds-beat-actively-managed-funds-2466411
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