So. As reports suggests, an index fund would TEND to outperform an actively managed fund. Not always, of course – but we’re just talking about probability.
If you’re willing to settle for market returns (like myself), good for you! Like many others, you must be thinking what else you could do to boost your chances, right?
As it turns out, there is something else you could do to supercharge index investing – looking at index investing at the portfolio level.
Benke and Ferri pitted all index-fund portfolios against portfolios holding comparable actively managed funds under six different conditions. The results demonstrate that “a diversified portfolio holding only index funds in all asset classes is difficult to beat in the short-term and becomes more difficult to beat over time,” the authors wrote.
What’s more startling was that comparison was focused purely on performance by taking away many of the other real world factors that would have favoured index funds.
- They excluded sales loads and redemption fees from active fund performance, because the fees have a negative impact on returns.
- They selected the index fund share class with the highest expense ratio when two or more share classes existed.
- The authors did not rebalance the portfolios in any of the tests; and they analyzed pre-tax performance even though index funds tend to have better tax efficiency.
Personally, this is an amazing revelation to me but execution would be a totally different beast altogether and would most definitely go against my “Keep my Investment Simple, Stupid” (KISS) strategy. Imagine the numerous funds to manage and rebalance!?
My only hope is that Betterment would one day make its way outside of US to our sunny shores.