Actively Managed Funds Are Risky Business

By Become A Better Investor

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Written in 2007, this book is very much in keeping with its title; it sets out clear and concise arguments to persuade you why you should be investing in Passively Managed Index Funds, rather than in their riskier counterparts: Actively Managed Funds. It teaches you how to make sensible investment choices for long-term financial gain

This book ranks 3 out of 22 in my personal rank of investing books. I loved this simple style of writing. One of the biggest things I took out of this book was a chart which Bogle produced which broke returns over the last century down into three elements: Dividends, earnings growth, and PE change. This was where I got the idea of my concept of “The Dream Factor” and showing the main factors that drive markets.

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John Clifton Bogle is the founder and retired CEO of The Vanguard Group. His 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor became a bestseller, and he followed this investment classic with four more titles, of which The Little Book of Common Sense Investing was one.

The Little Book delves into the differences between Actively Managed Funds (AMFs) and Passively Managed Index Funds (PMIFs) in a language even the newbie financial investor can understand, and it offers concrete facts to support its arguments.

A Book With a Bias

Bogle argues that AMFs are risky because the fees and the cost of investing in them add up to a hefty chunk of your expected return profit. If they perform well, you are still likely to gain less profit from them as lone funds than if you invest in PMIFs, which mimic the performance of the overall market. He offers sweeping statistical evidence to support his arguments too.

Fund Managers Rarely Disclose the Actual Dollar Amount for Their Fees

Pretty amazing. According to Bogle, they play on their ‘high’ returns and don’t actually tell unsuspecting investors what they will earn after the Fund Manager’s fee deduction. So investors can go into this type of investment without all the facts solidly presented to them. Investing in Actively Managed Funds will eat up your hard earned money while making your financial mediator a small fortune.

Don’t Let Emotions Run Your Finances

One of Bogle’s suggestions is to not fall victim to overconfidence, a tendency some investors have when trying to pick and invest in individual stocks and funds. Instead of making short-term, volatile bets on the market with AMFs because of sway from popular opinion or clever marketing, try and invest in PMIFs which hold diversified portfolios. A more cost-efficient method of investing long-term.

If Bogle cannot persuade you away from AMFs entirely, he offers sound and sensible advice for the other suggested 95% of your financial investments to put towards returns from the real value of the market in the long run. Good advice to consider for your financial future.

 


Haven’t read it yet? It won’t be a waste of time.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

 

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About the Author

Dr. Andrew Stotz, CFA
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.

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