For passive index fund managers – the game is up.

Passive index, Active, Self-managed?
The real name of the game is a positive return on your capital – every year

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The index, even including dividends, has made a small gain in 10 years, averaging just over a 1% gain p.a.

As investors looking for a ‘real’ return on capital it is important that we are aware of, and understand, what is happening in the investment playing field. This is especially relevant when you see the large sums of money currently being thrown at the fund management business. The recently released S&P survey tells us only 20% of managers outperform. This tells me there is still a lot of ignorance when it comes to whom you give your money too, and if it is true, why would you. Retail investors are happy to pass on the responsibility of investing their money to a high cost, low performance fund manager.

Why?

Firstly because everyone else is, you know crowd behavior says its safe because everyone else is doing it! The very nature of index funds says they cannot outperform the index so why would you give them your money. The index minus your costs is the return. Thus you have to get underperformance.

Secondly it also allows your funds to match the index as they will evaporate to as the market goes down and of course the wise manager with all his inbuilt costs will still charge you for that ‘feature’. I find this extraordinary that we accept that. It simply doesn’t make sense. Remember markets don’t go just one way, so sooner or later they will go down as they did during the GFC. We all have short memories it will happen at some stage.

Thirdly you wish to pay a high cost 1-2%, or a lot more in some cases of double dipping by managers of managers.

The ETF monolith is also an untested fad that apparently offers a better-cost deal (the big attraction) and it is attractive for the benefits of diversity and costs but has yet to be put through the wringer of a GFC. The gloss of a new car is a beautiful thing but tinkering under the hood can reveal the many ‘concerns’ about third party risk and other such issues as a domino effect waiting to unravel. And we all know who’ll be left carrying the can if something goes wrong. As its unknown it’s a risk. For now the ETF ship is steady but as we know it only takes one event to unravel the whole thing and your capital.

Be aware of what you are invested in and take responsibility for it. You don’t need to be nor should you ever have to be exposed to ‘unknown’ risk unless you know what you are doing. Risk management not index hugging is of utmost importance in achieving a consistent and protected return. As attractive and alluring as it is, for some financial products we too easily forget or ‘ignore’ the risks in the name of comfort and not rattling the cage – until the bear bites.

The future is uncertain but the good news is things are changing for the better. At the moment Stockradar offers a low fixed cost fee for service and more importantly outperformance. There are low cost online trading platforms to use for execution. There are now low cost SMSF auditors and administrators. There is also something called Self Managed Accounts (SMA) that you may be aware of. When the great attributes of these ‘products’ come together a powerful force will be unleashed for the benefit of you the retail investor – both in a cost and performance basis. The fight back is occurring. For the funds management industry the game is up. It’s a no brainer on a cost and performance basis. Take back control of your investments.

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