John Bogle, the founder of Vanguard was also the founder of index investing.
John’s mantra is that the market beats most active investors. So why pay a hell of a lot in investment fees for active funds when low-cost index funds do the job. I usually like a mix of index and well-managed active funds.
On 27 February 2007, the S&P index turned 50 years since its inception on March 1, 1957. The Wall Street Journal reports that since its inception to the end of 2006, the S&P 500 index has returned 10.83% a year that most active equity managers have found difficult to match.
Therefore, if you invest $1,000 in an S&P index fund for a grandchild, this meager sum will accumulate to $171,000 when the grandchild reaches 50, assuming a 10.83% return and the grandchild is just born. Of course, as always, past returns are no guarantee for the future. On the contrary, if you invested $1,000 in Berkshire Hathaway in 1963, today that investment would be worth about $7 million. But here is the catch! Who can find the next Hathaway, Google or Microsoft out there? It would require lots of skill, patience, luck and risk-taking.
Few people realize that stocks and bonds are mostly bought and sold in a secondary market. Stocks, for instance, are available for purchase because someone else is willing to sell in this secondary market. While the buyer thinks he or she is making a "good buy" the seller at the other end is thinking he or she is making a "good sell." At one end of the spectrum could be a few big fish waiting to buy or sell and at the other end thousands of small fish wanting to buy or sell. The big fish has the money to hire experts and get good advice, the small fish rely on some article they read in a magazine or newspaper or act on sentiment and impulse. In fact when individual investors are ready to jump in and "buy, buy, buy" or "sell, sell, sell," market mavens on the lookout for a correction have been waiting to do the opposite as individual investors - like a lion pouncing on its prey. Simply put, a buyer or seller of stocks in the secondary market is a smart or foolish or just plain lucky or unlucky at some point in time. However, as always there some wizards out there who know what they are doing and make a lot of money on market dependence.
Small time investors like the UN types, can benefit tremendously by starting to invest long before retirement in a good mix of mutual funds with exposure to a diversified stock and bond portfolio. For further knowledge in the area please refer to similar articles in the Personal Finance Index at 2Merrill .
Disclaimer: The above essay is presented solely for "educational purposes" and does not hint or offer any specific financial advice. For financial advice, please seek the advice of a professional if you feel unable to handle your own finances.
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