With the imminent release of the film sequel, Wall Street: Money Never Sleeps, I dusted off the original to reacquaint myself with the notorious Gordon Gekko.
Gekko is a significant character in movie history, with his “greed is good” speech regularly referenced to this day.
Unfortunately, it also overshadows some of his lesser known, yet more important lines.
“You ever wonder why fund managers can’t beat the S&P 500? Because they’re sheep, and sheep get slaughtered,” says Gekko to his young protégé, Bud Fox.
When investing, that’s one line that really matters.
Gekko is talking about investment managers who play an active role in the market – constantly buying and selling shares, trying to outperform the market as a whole.
It rarely works. It seems a sexy concept, to be trading, analysing shares and charts, and looking for the next big thing, but the results aren’t so sexy.
Investing in a passive index fund, holding a representative snapshot of shares in a particular market, regularly offers better returns than investing in an active fund, where shares are regularly bought and sold.
While research has long proven this to be the case, I decided to be absolutely sure for myself – comparing the overall ASX 300 return against the returns of Australia’s most recognised active funds.
In the five years to June 2010, the ASX 300 outperformed almost 69% of the active funds.
No names, but those funds were from some of the biggest investment firms.
The reasons active can’t beat passive are simple – fund managers’ costs, through fees and taxes.
The make up of the passive index fund is known, so it costs less to run. No highly paid stock pickers or analysts are needed.
Factor in regular trading and there’s more likely to be capital gains liabilities passed onto the investor. It’s why passive funds have continued to slaughter active funds!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. We think we’re Tasmania’s best financial adviser If you’d like help with your financial future, we ‘re one of only six certified fiduciaries in Australia.
