I Promise You…Average Investments
Low cost index funds that promise you “average” returns can be a hard sell. Here is how my conversation goes when explaining it to prospective clients:
KURT: If you want to know the single biggest predictor of a mutual funds future success – just look at it’s cost. For mutual funds that cost is known as the “expense ratio”. The lower the expense ratio the better the chances of beating most mutual funds out there. Cost is constant (you pay regardless of making or losing money) but good performance comes and goes. Vanguard index funds are low cost and should make up the bulk of your 401(k) menu.
EXECUTIVE: I agree cost is important, but I would be willing to pay more for better performance.
KURT: You mean you would be willing to pay more for better past performance.
EXECUTIVE: (Puzzled look…)
KURT: No one knows what an investment will do in the future and past performance is such a horrible indicator of future performance, that the government even requires that I tell you that.
EXECUTIVE: OK – cost is important but why index funds? They almost guarantee you “average” returns by buying the entire market. Shouldn’t we try to beat the market?
KURT: A recent AARP study found that over 90% of drivers think they are above average.
EXECUTIVE: (Puzzled look again…)
KURT: Ask any stock broker if they have a method for finding above average mutual funds. 100% will think they do. The fact is that over 70% of funds out there do worse than average. That under-performance could cost you and your employees thousands over a lifetime.
EXECUTIVE: I never thought that I would be hoping for “average”.
KURT: Try selling “average”.