Index funds could be an expensive mistake

The past couple of years have been very difficult for investors. It has also been a tough time for the professionals, with most managed funds and LICs showing mediocre results and a large number with negative returns.

It is not surprising that many investors have become disillusioned and there has been a huge inflow of cash into index funds. Many investors seem to be accepting the advice of Warren Buffet who is an advocate of index funds for the small investor when he says: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” (2016)

But how sound is this advice in 2017 and how good is index investing? Consider the following monthly chart of the ASX200.Index investing

If you had invested in an ASX200 index fund on January 3, 2007 when the index was at 5684 and measured the performance on 2 June 2017 when the index was at 5788, the returns would have been as follows. Over a little more than 10 years the index has risen by only about 1.8% giving an annual return (before fees) of a mere 0.18%. As an investor, you would be aware that during this 10 year period the inflation rate has averaged 2.4%.

Over the coming years there is every indication that returns to investors will continue to be poor so it is probable that returns from index investing will continue to be unacceptable.

Does it make any sense to invest in index funds under these conditions? There must be a better alternative for someone who needs to be a self-funded retiree for maybe 30 years?

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