All You Need To Know About Passive Investing
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For their low cost and simplicity, many investors are switching to passive index funds, including a number of experts who are famous for their active investment success.
If You Want Exposure To Stockmarket Assets, Consider Passive Index Funds
The Cost Of Passive Index Funds Is Plummeting
The industry of passive index funds has seen a new wave of cost cuts as competitiveness drives a price war across the market. You can now pick up a couple of Blackrock UK passive index funds for an on-going annual fee as little as 0.07 per cent. The US versions are not much more at 0.08 per cent.
Some commentators believe the yearly price could fall to as low as 0.03 per cent, in line with the cheapest passive index funds in the US.
It really does pay you to read the smallprint and check the charges, for big providers like Henderson and Virgin still charge between 0.75 and 1 per cent per year. That’s a lot of wasted money for what could be exactly the same passive index funds. In fact, some UK equity income funds are essentially passive index funds with a higher annual charge, which again can waste your money.
Compared to active funds, or those managed by a discretionary fund manager or an independent adviser, low cost passive index funds can pretty much guarantee average stockmarket performance. It's no surprise passive index funds are so popular.
Warren Buffett On Passive Index Funds
Warren Buffett, arguably the greatest investor of all time, shocked the investment world in 2014 when revealed he didn’t trust anyone to pick winning stocks after he was gone. On his death, 90 per cent of his wife’s estate would be put into a very low cost S&P 500 passive index fund, and the rest held in cash.
I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.
This isn’t the first time he’s talked about passive index funds. In 2007, he famously declared that passive index funds are better for most investors.
A very low-cost index fund is going to beat a majority of the amateur-managed money or professionally-managed money. The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns. You'll pay lots of fees to people who do well, and lots of fees to people who do not do so well.
There’s much to be learned from Warren Buffett. That includes the 10 financial lessons set out below.
Harry Markowitz On Passive Index Funds
Harry Markowitz, the Nobel prize winning economist, is one of the fathers of modern portfolio theory, so it’s no surprise he liked choosing funds. What is interesting though is the inventor of the Markowitz Efficient Frontier of portfolio construction took a far simpler approach to creating his own simple portfolio.
I should have computed the historical co-variances of the asset classes and drawn an efficient frontier. But I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50:50 between stocks and bonds.
David F Swensen On Passive Index Funds
David Swensen, manager of the prestigious Yale endowment fund, beat the market by investing some of its billions into hedge funds, private equity, and real estate. His best-selling book ‘Unconventional Success’ altered the way large pension and endowment funds ran their money. Yet in this book and elsewhere, Swensen consistently says most people and most institutions should stick to passive index funds.
There are two sensible approaches to investing — either 100 per cent active or 100 per cent passive. Unless an investor has access to incredibly high-qualified professionals, they should be 100 per cent passive: that includes almost all individual investors and most institutional investors. Most active mutual funds are more interested in collecting fees than in boosting returns for the investor.
10 Financial Lessons We Can Learn from Warren Buffett
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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