Stock market investors who are very confident in their investment decisions will not feel the need to pay a fund manager to help them. They believe that they can beat fund managers and “beat the market”.
What do we mean by “beat the market”?
We say an investor “beats the market” when they produce better returns than if they had simply invested in an index fund that tracks the market.
Warren Buffett is one of the most iconic and successful investors of our time. Buffett is a master of value investing wherein patience, discipline, and risk aversion are the essential ingredients for success.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” Buffett said. “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals,” Buffett said.
Of course, if you consider yourself to be in the same league as Buffett and better than other fund managers, there are certainly some advantages to not engaging fund managers or investing in an index fund.
Firstly, if the investor gets more decisions right than they get wrong, they should make higher than average returns.
Secondly, you do not have to place your trust in a fund manager. After all, these fund managers might misjudge the market and make more wrong decisions than right decisions.
Thirdly, you avoid fund management fees by not having a fund manager. Often there are two fees, one for fund management and a second fee known as an “administration fee”.
The advantages do seem very good. In summary, no need to trust other people and you avoid costly fund management fees.
But what if you lack confidence making your own investment decisions, what then?
Warren Buffett acknowledges that individual stock picking is not for everybody. In fact, Buffet says, “Most average, long-term investors would benefit from a much simpler strategy: investing in low-cost index funds”
Buffett recommends investing small amounts in an index fund slowly over a long period of time. This is known as “dollar-cost averaging” and it is a good strategy for most long-term investors. Most importantly, Buffett says, never overpay in fees.
Buffett is referring to a fund’s management expense ratio (MER), or the fee you pay the brokerage to manage your investments, expressed as a percentage of your total account balance. This MER is taken out automatically, so it can be easy to miss, but it’s clearly advertised on each fund.
For example, if you invest in an index fund with a 0.10% management expense ratio (MER), the brokerage will take $1 for every $1,000 of your total account balance annually.
The below table is the index funds traded on the ASX – see here: https://www2.asx.com.au/markets/trade-our-cash-market/asx-investment-products-directory/etps
Eg: By using the ASX Code = “A200” you can invest in the BetaShares Fund Manager product known as “BetaShares Australia 200 ETF”. The “A200” index stock tracks the Australian Top 200 shares by market capitalisation.
Watch this video to learn more about the “A200” index
The A200 index is available from a share trading platform such as CMC Markets https://oaf.cmcmarkets.com/en-au/onboarding-start?iaid=429826