Index Funds vs. Actively Managed Funds: 2014 Results

I advocate investing in low-cost index funds as opposed to trying to find actively managed funds that outperform the market.  Many studies have shown that, over time, this will almost surely give you the best results. 

So how did this method work in 2014?  The January/February issue of Money Magazine had some interesting statistics.  The results are through November, 2014:

Index Funds vs. Actively Managed Funds

The average index fund returned 8.0%.  The average actively managed fund returned only 6.8%.

Low Cost vs. High Cost Funds

The average low-cost fund returned 15.1%.  The average high-cost fund returned only 12.9%.

Investors vs. Funds

The average fund return was 6.8%.  The average investor return was 6.0%.  This can be attributed to bad timing by investors.  Investors bought more after days when the market gained and sold more after days when the market lost, which is the exact opposite of a winning strategy.     


It is rare in life for the easiest method to be the best method, but this is true in investing.  The best strategy for almost all investors is to regularly invest in low-cost index funds. 


The statistics cited above for 2014 are not unusual.  On average, index funds beat about two thirds of actively managed funds each year.  Over time the probability of a passive, low-cost, index-fund strategy beating actively managed funds grows to over 80%.  Life is complicated enough in other areas.  In investing, keep it simple and reap the rewards.   


If you are not already using low-cost index funds as the core strategy for your investments, consider doing so now. 


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