Invest like You’re Shooting for Par

Timothy Brown |

investing-index-fundsIt is not easy to shoot par.  Professional golfers can shoot par on a good day.  On a great day, they shoot under par.  However, even the best golfers in the world have times when they shoot over par.  For instance, at the 2012 Masters, Tiger shot 72, 75, 72, 74 – 5 over par on the tournament.   McIlroy, who came so close to winning the Masters in 2011, shot 65, 69, 70 in the first three rounds, taking a 4 stroke lead into the final round.  But McIlroy shot an 80 in the final round – 8 over par on the day – surrendering his lead and the championship.  Two of the best golfers in the world failed to shoot par consistently in the difficult tournament.

Wouldn’t you like to invest in a way that you could shoot par with your investments every day?  Wouldn’t you like to be invested in funds that beat the majority of other funds consistently?  The good news is you can! Passively managed index funds and asset class funds are funds that buy the whole market or asset class.  Buying these funds helps improve your chance of getting you the return of the market, i.e. shooting par, without of the risk of under-performing the market.   But with anything, buyers must be aware.  Not all index funds are created equal.  Every fund has costs associated with it, so you must compare these costs to understand your actual return on the investment.  The best strategy is to buy index funds with lower costs.  Low expense funds cost between 0.10% and 0.80% a year depending on the nature of the fund (i.e. US Large Cap vs Emerging Markets Small Cap).  If two index funds are buying the same underlying assets, buy the cheaper one.  A recent study by Morningstar, showed that picking funds with the lowest expenses improves your chance of picking top-performing funds.

One concern we often hear from investors is, “if I buy an index fund, I will only get average returns”.  My response is, “What is average about shooting par every day?”  Index funds and passive asset class funds enable you to do this.

Most investment advisors pitch that they can somehow read the tea leaves and pick the funds or companies that will beat the benchmarks.  Unfortunately, many hopeful investors believe these claims.   Research is not on their side.  In fact, about 2/3 of all actively managed funds on average, fail to beat the benchmark.  In Rick Ferri’s book, “The Power of Passive Investing,”  he compared actively managed funds to the S&P 500 from 1985 to 2009.  66% of the funds over that time under-performed the benchmark by 1.69%.  Of the remaining 33% that beat the benchmark, on average they only beat the benchmark by 0.96%.

We don’t think the risk is worth it.  Investors are better off buying the benchmark, reducing their costs, and having the satisfaction of beating 2/3 of the funds over time without taking the risk of seriously underperforming the market.  Don’t risk your retirement nest egg and hard earned money trying to do something that has been proven over and over again to be a losing proposition.  Invest in a way that you can shoot par every day and you will be investing like the pros before you know it.  The extra investment earnings will help you work on shooting par on the golf course!  Do you have any questions on index funds?