Some rich folks pay over 2% a year plus 20% of profits to invest money with the likes of hedge funds, with no performance guarantees. On the other hand, average investors can invest and get good investment management. At a yearly cost of less than 25 cents per $100 they invest while enjoying other advantages in 2011 and beyond.
Some of the rich and famous have paid handsomely for investment management and ended up broke. These are extreme cases where people trusted someone blindly, which is never a good idea when you invest money. If you invest in the right places you have government regulation and visibility on your side. Plus, there should be no surprises on the performance front; with downright inexpensive and good investment management working for you. Welcome to the world of mutual funds, specifically no-load INDEX funds.
Here’s how not to invest for 2011 and beyond: give a money manager total freedom to invest your money wherever he sees opportunity. No investment management outfit is good enough to win consistently speculating in the stocks vs. bonds vs. currencies, commodities or whatever game. You’re better off if you invest money in a variety of mutual funds and diversify both within. And across the asset classes: stocks, bonds, money market securities and specialty areas like gold and real estate. But be careful here too, because in ACTVELY managed funds you could pay 2% a year and still not get good investment management.
Most actively managed funds fail to beat their benchmarks (which are indexes). At least in part due to the expenses that are taken from fund assets to pay for things like active management. Plus, fund performance can be full of surprises from year to year. As management tries to beat their benchmark, an index. Index funds don’t pay big bucks to money managers to play this game. They simply track or duplicate the index. Let’s use stocks as an example, and say that you want to invest money in a diversified portfolio of the largest best-known stocks in America, with no surprises.
Invest in an S&P 500 index fund, and you automatically own a very small piece of 500 of America’s biggest and best companies. The S&P 500 Index is in the news every business day. And the names of the 500 companies are public knowledge and can easily be found on the internet. This index is also the benchmark that most stock fund managers try, and usually fail, to beat on a consistent basis. Is this your idea of good investment management? I’d rather just invest money in the index fund for 2011 and beyond. And know that I’ll have no big surprises in good years or bad.
Don’t overlook the cost when you invest money. Index funds are not an issue in money market funds. Where the major fund companies have kept costs low just to compete for investor dollars. But for equity (stock) and bond funds. Where they make their profits, you can pay 10 times as much when you invest in actively managed funds vs. index funds. And still not get good consistent investment management. Do you need to look far and wide to find a place. Where you can invest in stock and bond index funds at a cost of less than 25 cents per year for every $100 you have invested?
No, the two largest fund companies in America can easily be found on the internet: Vanguard and Fidelity. They both cater to average investors, and will more than likely continue to offer funds. Where you can invest money without paying sales charges (in addition to expenses) in 2011, 2012 and beyond. I suggest you check out their low-cost index funds. Or would you rather speculate and pay 10 times as much for yearly expenses elsewhere. Hoping to get really good active investment management – with no unpleasant surprises?
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
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