The value is in the plan, not the products
Question: How do I pick the best mutual fund amongst all those available? I read about so-called actively managed mutual funds and some people like them. Others think passively managed funds are best. I’m afraid I’m a bit confused by the whole discussion. Which is the best kind of fund to choose?
Answer: Have you ever watched an all star game?
The concept sounds great. You get the best players on each team in the league, split them into two teams made up of these all-star players and let them compete. Every major sport has an all-star game of one sort or another. It’s a great idea.
Unless you’ve ever watched one.
What fans are usually treated to is a game in which the world’s best players perform at a very mediocre level in a pretty boring game.
What’s the problem? The players are all-stars. But the teams are novices.
But for the week of the game, the athletes have never played together, practiced together, gotten to know one another nor formed any significant chemistry together as a team. In fact, these are not really teams – they are just collections of all-stars.
Most knowledgeable observers would agree that a team made up of mediocre players would stand a pretty good chance of defeating most all star teams. That’s because the team matters more than the individual players.
We would do well to adopt that same view regarding mutual funds (or any other category of financial product). Doubtless there are some that are better than others…much better. There’s no good reason to have laggards on your team if you don’t have to.
Managers of passively managed mutual funds believe that in the long term it is nearly impossible to beat the returns of the market. As a result of this belief, these managers seek to simply mirror a particular market index, so as to mirror its investment returns. The most common of these market indexes is the S&P 500. This focus allows passive managers to offer very low costs to the public.
Managers of actively managed mutual funds believe the market is not completely efficient. If a manager can uncover an area in which the market is over or under sold, he may be able to outperform a particular index.
Which is better? Which is the all-star player? Ask me in 30 years.
What I do know today is that the team matters more than any individual player.
The “players” are the individual component parts of your financial life - the products and services you use to try to get ahead financially. Yes, these do include mutual funds (actively or passively managed). But they also include mortgages, insurance products, retirement plans, pensions, Social Security, savings, bank accounts, real estate holdings and business interests.
The “team” is your plan. Your financial plan. A coordinated financial plan balances and directs (coaches) all the individual parts (products) in your financial life.
Don’t let a couple of ego-centric all-stars (actively and passively managed mutual funds) set the agenda for your financial priorities.
Focus on putting together a championship team – a world class (but personalized) financial plan, oriented around your life goals and dreams. Once you got a game plan for your team, you can turn you attention to backfilling the plan with the best players (products) you can find.
Plan first. Products a distant second.
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