Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
Fun with Numbers
It’s funny how taste tests always seem to go in Coca Cola’s favor. Unless it’s for Pepsi, then Pepsi wins. Somehow the same number of dentists recommend Crest and Colgate!? And 9 out of 10 doctors always seem to agree too. Your mind thinks 90%, but is it really? Maybe only 10 doctors were asked. And what’s up with that one dissenter?
Advertisers love to throw overwhelming numbers at your face to get you to buy in. This happens with investment products, too – like the battle between index versus managed (active vs. passive) funds.
Every year a new study comes out that shows how often indexes beat the pants off managed mutual funds. Like soda and toothpaste, the numbers in favor of index funds get exaggerated. And 90% seems to be the going rate here too.
Companies like S&P, benefit from this. They license their index to fund companies, like Vanguard who push indexing as the answer. If you have a product to sell, of course you’ll tell people it’s the best. When was the last time you heard Coca-Cola say, “eh, we’re ok, guess Pepsi might be better”?
A recent article at Marketwatch puts that number closer to 60% – still a good argument for index funds. I won’t disagree. The low-cost advantage index funds offer is hard to ignore. In most cases an index fund is the best choice. But there’s always an exception.
Index funds simply are not the superior product in every case. Some (but not all) managed funds have a place in a portfolio just like some (but not all) index funds do too.
Far too often the debate between index vs managed is the wrong one. It should be – what are you trying to accomplish then choose the best investment to meet that goal. Once you limit yourself to only index or only managed funds you could take the “best investment” off the table before you even choose.