I’ve got a way to increase your retirement savings by 25%.
The hot tip? “Passive” index funds.
These are mutual funds which track an index and – because they don’t pay a staff of “experts” to analyze which stocks may out-perform or to “time” the market – have lower expenses, trading costs and tax bills. Serious studies demonstrate that, over time, “passive” funds out-perform active funds by over 1% annually. In a 40-year working life of regular investing and saving, 1% annual out-performance would boost your savings at retirement by about 25%. That’s huge.
Of course, just because passive investing has out-performed in the past, it may not out-perform in the future. There are no guarantees in investing. But the reason for their out-performance – lower fees and expenses, and a reliance on market efficiency – gives me confidence they will continue out-performing on a long-term basis.
Billions of marketing dollars are spent by mutual funds, newsletter writers and other experts every year, trying to convince you otherwise. They want you to pay their high management fees and chase the latest hot fund. They want you to buy at the top, sell at the bottom, trade into the next hot fund, and repeat the cycle. They want you to ignore the fact that very few “active” funds or investors beat the market over the long run.
So it’s your decision. You can bet on beating the market. Or you can bet on passive index funds and their consistent out-performance. I know where I’m putting my money.