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In the midst of a record-breaking stock market run, investors continued shifting money from actively managed mutual funds to passively managed funds last month.
Morningstar refers to it as a “massive exodus” in a recent report on asset flows.
Actively managed U.S. stock funds saw $20.8 billion in outflow in January, according to the report. Over the same period, passively managed U.S. stock funds — also known as stock index funds — saw $30.6 billion in inflow.
Vanguard founder John Bogle recently referred to this trend as “a tidal shift to index funds — actually, more like a tsunami.” He notes in the New York Times:
“Since 2008, mutual fund investors have liquidated more than $800 billion of their holdings in actively managed equity mutual funds and purchased about $1.8 trillion of equity index funds.”
So it should come as no surprise that even President Donald J. Trump would be worth $10 billion more if he had invested in index funds instead of real estate.
We here at Money Talks News were not surprised by the latest news about index funds. Our founder, Stacy Johnson, has been educating readers about the value of index funds for years.
Why index funds?
An index fund is a type of mutual fund — a pool of investments like stocks or bonds — that mimics the performance of a particular group of stocks or bonds. The Vanguard 500 Index Fund, for example, mimics the performance of Standard & Poor’s 500 stock index.
Because they simply try to mimic an index’s performance, index funds are generally managed by computers. Thus they are generally cheaper than actively managed mutual funds run by a flesh-and-blood portfolio manager who tries to outperform an index.
By cheaper, I mean that index funds have lower fees, which means more money in your nest egg.
Consider this example we reported in “Of All the Fees You Pay, This One Is the Worst“:
Assume you have a current retirement fund account balance of $25,000. If returns over the next 35 years average 7 percent — even if you don’t contribute another penny to your account — you’d have $227,000 after 35 years if your account fees were 0.5 percent.
However, you’d only have $163,000 if your fees were 1.5 percent. That amounts to $64,000 less to live on in retirement.
To learn more about index funds and what they can do for your retirement portfolio, also check out:
- “How to Get Started Investing When You Don’t Have Much Money“
- “Ask Stacy: How Do I Invest in the Stock Market?“
- “Ask Stacy: How Do I Invest in a Mutual Fund?“
What’s your take on active versus passive investments? Share your thoughts below or on Facebook.