Trustnet Magazine Issue 21 September 2016 | Page 9

/ TRACKERS /

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Y

OU RARELY SEE
ANYONE EXTOLLING
THE VIRTUES of
passive investing in
the media. It’s partly
down to the nature of journalism.
We love a good story and, with
actively managed funds, there’s
always something new to write
about. Indexing, let’s face it, is dull
by comparison.
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portfolio around a core of index
funds, or indeed using them
exclusively. Here are five reasons
in particular.

THEY’LL SAVE
YOU A FORTUNE

You can’t predict the news, or
future market movements, but
one thing you can control as an
investor is how much you pay.
It’s hard to over-estimate the
importance of cost. Studies have
consistently shown that it is one
of the most reliable predictors of
long-term performance; the more
you pay, the lower your returns
are likely to be and the greater
the chance that your chosen fund
won’t survive.
Index funds are vastly cheaper
than active funds. You can now
track an index for fewer than 10
basis points – that is to say, less
than 0.1 per cent. By comparison,
investors using active funds
typically pay 30 times as much
or even more, once transaction
costs and other fees (many of them
hidden) are factored in. Because
of the effects of compounding,
the difference in costs over many
years is colossal. For a typical
UK pension saver putting away
regular amounts over 40 years, the
investment author Lars Kroijer
has estimated that difference to
be the equivalent of around seven
Porsches.

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Incentives also play a part.
The media needs the advertising
revenue that active funds provide,
and the so-called “experts”
journalists call on usually earn a
living from active management
(most either manage active funds
themselves or work for brokers
that sell them).
There is, however, a very strong
case for building your retirement

YOU KNOW WHAT
YOU’RE GETTING

Buy a fund that tracks large-cap
UK equities and you know it will
contain the stocks of large UK
companies and nothing more; the
same applies to a European smallcap fund, a US Treasuries vehicle
and so on. But buy an actively
managed fund and you could be
investing in all sorts of things. It’s
very common, for example, for an
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