This is the fourth and final part in my series on ways to invest your money, click here to read part one, part two, and/or part three.
I was originally going to write about Index Accounts as one post, but due to the complexity and misinformation about this topic, I decided to split this up into two posts.
To recap what I have stated in previous weeks, with all the hundreds of thousands of ways to invest your money, I believe there are only three ways in which your money will work within each of these investments.
The three labels that exist today are:
Fixed Accounts
Variable Accounts
Index Accounts
Most people are familiar with how fixed accounts and variable accounts work. We may not understand all the fine details of these types of accounts, but we have heard of them and are somewhat knowledgeable in how they work.
This article is about the Index Accounts.
The types of Index Accounts that I am referring to bring together two ideas:
#1 – The average investor/money manager can’t beat the performance of the stock market (specifically, the S&P 500).
#2 –Never lose your money.
Let’s explore these two ideas.
#1 – The average investor/money manager can’t beat the performance of the stock market (specifically, the S&P 500).
According to Dalbar, Inc. – an independent company that studies investor behavior and analyzes investor market returns – the average investor consistently earns below average returns.
For example, according to Dalbar Inc., for the 20 year period ending Dec. 31, 2010, the average equity investor had a return of 3.83%. During that same period, the S&P 500 returned 9.14% annually. This is a difference of 5.31%.
It really shouldn’t come as a shock to many of us that the average investor can’t beat the performance of the stock market, but what about the highly paid money managers?
How do the money managers, who are paid 100’s of thousands of dollars a year, and have every research tool known to man at their fingertips, perform compared to the stock market?
Doing a quick search on the Internet about how well the average mutual fund performs when compared to the stock market, and you’ll find some alarming statistics. Most of the information I found shows that approximately 80% of mutual funds underperform the average return of the stock market.
Furthermore, according to author Charles Ellis of Winning the Losers Game, “the basic assumption that most institutional investors can outperform the market is false. The institutions are the market. They cannot, as a group, outperform themselves. In fact, given the cost of active management – fees, commissions, market impact of big transactions, and so forth-85 percent of investment managers have and will continue over the long term to underperform the overall market.”
Sadly, there have even been studies done showing that monkeys throwing darts at board pick winning stocks almost as effectively as money managers/stock brokers.
So what’s the alternative?
This is the main reason why many companies have begun offering various types of Index Accounts. Some Index Accounts fall into the category of Variable Accounts, in that your investment can go up and down.
Other types of Index Accounts are designed to protect an investor’s principal, and previously earned gains, without the risk of losing money when the market goes down.
I will explore these accounts next week as they are the basis of what I call Index Accounts…….to be continued…
*The articles and information on this blog are for education and entertainment purposes only and should not be taken as financial or legal advice. I understand that every person’s situation is unique and should be treated as such. Please contact me, or another financial professional, for specific advice regarding your situation. I try my best to keep the information current, but things are always changing, therefore some of the information posted may be different now than when it was first
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