What is the best way to invest your money?
HOUSTON – On the tennis court, Hal Hale, a family law attorney, is a fierce competitor.
He is always pushing himself, battling hard, striving to win every point, trying to get the very best results out of his body.
Hale takes the same approach to investing his money: He wants to get the absolute biggest bang for his buck.
So five years ago, tired of hearing all the hype about what he considers expensive actively managed mutual funds, Hal started doing his own research on index funds.
“Well, they’re far superior to (actively managed) mutual funds in that they’re much cheaper, oftentimes many, many times cheaper and they outperform most mutual funds,” Hale said.
What is an index fund?
We asked registered investment advisor Richard Rosso at Clarity Financial to explain.
“An index fund is a broad-based representation of a stock market. It’s going to hold pretty much all of the stocks in a particular market. They are low cost and the reason they are low cost is I don’t have to pay any professional managers trying to buy and sell stocks, trying to beat the stock market. All I want is to own a piece of all of these companies in that market,” Rosso said.
In other words, an index fund is a basket of different stocks designed to copy an index such as the S&P 500.
Unlike mutual funds, you are not paying for a big staff of stock analysts and managers who are constantly trying to pick winning stocks and shed losing stocks, which is expensive.
Instead you simply own all the stocks in the market you are trying to track.
Instead of trying to beat the market, you are simply trying to replicate the market, because oftentimes, those mutual fund managers fail to even do as well as the market.
So in an index fund, wherever the market goes, up or down, that’s where your money goes.
“So, if you owned the S&P 500 index fund last year, because the S&P did roughly 19 percent in returns, so did you. So you had a great year last year,” Rosso said. “Just remember, if the market drops 30 percent, your money drops 30 percent as well. So you have to be prepared for up markets and down markets."
How have index funds done lately?
“Interestingly, what’s happened over, say, the last 10 years, is that a lot of these actively managed mutual funds have not done as well as the index funds,” Rosso said.
When asked which investment he puts the bulk of his clientele into, actively managed mutual funds or index funds, Rosso said, “Generally speaking, we spend more time with index funds.”
Drew Powers is a financial advisor with The Shakiba Group, and he says close to 80 percent of his clients are in mutual funds.
“Index funds save clients’ money, a lot of money, and they perform better in up markets,” Powers said. “See, the overall goal for an actively managed mutual fund is to beat the market."
“So do they usually beat the market?” KPRC2 Investigators' Bill Spencer asked.
“Statistically speaking, no, they don’t,” Powers said.
If that’s true, one could argue why in the world would you want to be paying for all of these expensive analysts and managers at an actively managed mutual fund?
Still, Rosso warns you want to get into the biggest, broadest, most diversified index funds, and stay away from index funds that track a very narrow market.
“I can find an index fund that goes into this little, little, niche, like I’m only going to invest in retailers that sell online. That index fund sounds sexy, but they are more expensive and they trade erratically,” Rosso said.
Instead, Rosso suggests funds such as the Vanguard 500 Index fund, which has been in existence for 40 years and, according to Investopedia, has delivered an average return of 11.1 percent over those four decades.
He also mentions the Schwab Total Stock Market Index Fund, which is meant to track the entire stock market and has delivered an average return of 12.6 percent over the last 10 years.
As for Hale, the gutsy tennis player, he's been invested in two different index funds for five years.
“I am very happy I bought these index funds. I’ve saved a lot of money doing it,” Hale said.
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