Trustnet Magazine Issue 21 September 2016 - Page 9

/ TRACKERS / 1 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. 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. 2 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 7