Tuesday, June 19, 2012

Why Everyone Should Buy Index Funds

Question: What are your odds of picking a mutual fund that beats a low-cost index fund? 

Answer: Zero

Proof: Watch this video of University of Chicago Finance Professor Gene Fama.

Want more proof?: Here's the research behind the video.

Quick Summary:
Famous finance professors Gene Fama (Univ. of Chicago) and Ken French (Dartmouth) analyzed all actively-managed US stock mutual fund data from 1984-2006.  They found
that only 15% of mutual fund managers beat index funds BEFORE fees.  Only 3% of mutual fund managers matched index funds AFTER fees.  Thus, your odds of picking a winner are zero.

This is why I recommend everyone own Vanguard index funds and use them in my investment recipes in my book, "The Rollover IRA Cookbook".

(Hat tip to NC State finance Professor Richard Warr and his Finance Clippings blog.)

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