Few financial experts attempt to take on experienced and wealthy traders like Warren Buffet. But for Tim Armour experience does not cushion one from making mistakes. He points out to the recent claim made by the billionaire that he can easily outperform a team of fund managers by just investing in an S&P passive index fund. Although the billionaire is likely to win the bet this year, Tim has, however, focused on highlighting the flaws that are associated with making such investment strategy.
According to Tim, most of the passive index funds have little returns due to their high management fees and excessive trading. These costs cut on the returns that the investor can get, thus eliminates their potential to generate long-term returns. A sound investment opportunity fund must have low costs.
In addition, the claim made by buffet creates the notion that passive index returns are safe and ideal for retirement fund. The fact is that the funds do not protect investors from the adverse effects of down markets. This way, investors may end up incurring huge losses on their investments. Notably, more than half of investors who were interviewed by Tim’s company in the recent past were not aware of this risk.
According to market data, an investor who invested $10,000 in the first S&P 500 index fund four decades ago should have more than half a million dollars. If another investment was made at the same time on the top five active funds in America, such an investor would be wealthier than the passive index fund investors. Tim highlighted some active funds such as Washington Mutual Investors Fund, The Growth Fund of America, American Mutual Fund, The Investment Company of America, and AMCAP.
In conclusion, Tim says that there is no clear way to tell beforehand the fund that will do better. However, he notes that investors should focus on investment funds that have low costs and high manager ownership. According to the executive leader, such funds have been known to constantly perform better than others.
Tim Armour is Capital group’s chairman and CEO. The financial expert joined the company in 1983 through the Associates Program. Previously, he worked for The American Funds as a senior vice president. In July 2015, he was elected to serve as the company’s chairman. Tim is an alumnus of Middlebury College where he graduated with his bachelor’s degree in economics.