Trying to beat the market through trading based on impressions of short-term trends has the opposite effect.
There’s a new study assembled by researchers from three university that shows that those who invest in index funds have better investment returns than those who invest in managed funds. In fact, those who invest in no-load index funds have better returns than those who invest in load index funds (which have additional fees).
The investment results are compared with their own funds. Index fund investors beat the stated returns of their funds.
Investors in no-load (that is, no-commission) index funds actually beat the returns of the funds they hold by 0.42 percentage point annually… Those active-fund investors lag the returns of their funds by an average 1.86 percentage points annually.
To explain further, the 5 year average annual return of VFINX, the Vanguard 500 Index matching the S&P 500 Large-Cap Index, is 11.48%. The average index fund investor, according to this research, actually earns 11.90%. The average investor in AIVSX, a large-cap managed fund with a 5 year average annual return of 12.08% with a 5.75% front-end load, actually earns 10.22% annually.
This is attributed to trading behaviors. Index fund investors are less likely to enter and leave the stock market at the wrong time.
The study was sponsored by Zero Alpha Group, an organization that holds the philosophy that the best investment strategy is passive investing. “Zero alpha” refers to the idea that active management of a fund provides no benefit over a benchmark like an index.
Index-Fund Tortoises Are Long-Term Winners [Wall Street Journal]
Press Release from Zero Alpha Group
Investor Timing and Fund Distribution Channels [pdf Report]
Updated August 9, 2011 and originally published December 28, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.