Active Funds Vs Passive Index Funds: Which Way to Go?

In a commentary by Tim Armour about Warren Buffet’s assertion that investing in passive index funds such as S&P 500 is more profitable than investing in hedge funds, Tim has a different opinion. However, he agrees with Buffet on some issues. He agrees that indeed there are unscrupulous hedge fund managers who shortchange investors and that there is need to offer low cost and simple investments. He also supports Mr. Buffet’s advice that is analyzing companies rigorously to build a durable portfolio.

Tim advises that investors should be careful of product labels whether passive or active but rather, their interest should be on what serves them best. Some mutual funds charge high management fees and do excessive trading thus offering poor returns. On the other hand, risks and costs foregone in passive index investments are normally underestimated making them look better than hedge funds. However, usually, this is not always the case. Therefore the debate should not be about passive or active funds but about which fund provides the best returns to the investors.

According to Tim passive returns are not always the safest way to retirement as it is commonly thought. According to him, index funds may be good, but they do not cushion one from down markets. They are usually susceptible to volatility and may lead to losses during market downturns.

It is, however, difficult to tell which fund will do better than the other as there is no clear way of doing so. However, the on two simple ways to achieve this is through the provision of low-cost funds. Also, the fund managers should invest alongside the investors in their own funds to ensure that the fund managers develop a well-benchmarked model that guarantees good returns.

About Tim Armour

Tim Armour is the CEO of Capital Group, an American financial services firm. He joined the company in 1983 as a participant in the company’s Associates Program. He was then promoted to Equity Investment Analyst covering US service companies and Global Telecommunications. In 2015, he was appointed as Capital Group’s chairman. He is also the chairman and director of Capital Research & Management Company.

With his extensive management and investment experience, Tim has held other prestigious positions in different companies. He is a graduate of Middlebury College in Economics. Tim is currently based in Los Angeles.

About Tim Armour: medium.com/@timarmour