Here's some conflicting advice we will often hear:
Some say the active fund managers can't beat the market, the average is the new best, etc. Others are saying you should study the market and stocks etc.
What's the point of doing it actively when you can't beat an index fund?
To get some perspective, let's compare these two investors, A and B:
A is an investor who invests in an actively managed mutual fund while B is an investor who invests in a low-cost index fund. Both had contributed a $1000 monthly into the fund of their choice.
Now let's say the mutual fund that A invested had a past performance with an average of 9% return. While the index fund that B invested only had an average of 7% return.
Based on this data, I can answer you that, actively DOES in some way outperform the passively managed fund. BUT here's the problem… After 5 or 10 years, despite the lower return, B had somehow accumulated a bigger return compare to A.
So what happened? The reason investor A did not beat investor B is because of the fees he paid.
Transaction Fees – initial sales charge or redemption charge, are calculated as the percentage of the NAV of the fund, assuming 3% sales charge, then his monthly contribution to be exact is only $970.
Expense Ratio – a fee paid for by the mutual fund, or management fee charged by the fund manager. Say around 2% for the mutual fund, this again reduce the overall return.
What investor B invested instead, is a low cost, no commission index fund, with a very low expense ratio.
Thus, you should study the market and stock, and ONLY invest in things you understand about. BUT, the trick is you will have to manage them yourself!