Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have no reliable way to tell beforehand which actively managed fund will return more than its costs, when compared to an index fund.
Because higher fund fees cause the average actively managed fund to trail the return of index funds, your chances of picking a supposedly superior actively managed fund are greatly reduced.
Only a minority of actively managed mutual funds and ETFs perform well enough to compensate for their higher fees in the short run. In the longer term, even fewer actively managed equity and bond funds will beat the market, because “superior” short-term performance is mostly due to luck rather than to skill, and luck tends not to last.
Certain scientific studies have demonstrated that some professionally managed equity mutual funds seem to exhibit a very modest level of apparent skill in their ability either to choose stocks and/or to manage their stock portfolios. These funds may be slightly better stock pickers, and/or they may have better portfolio management practices. In managing their portfolios, these funds may not make the behavioral mistakes that many individual investors do, such as holding losers too long and selling winners too quickly.
Scientific finance studies have demonstrated a very slight persistence in stock price trends for some, but not all equities. This persistence could benefit portfolio managers who hold their winners longer and sell their losers more quickly. Evidence of skill for bonds seems entirely lacking, so buying lower cost bond funds is clearly a better strategy.
Note: Just because scientific finance studies do not support buying actively managed stock and bond funds on a net investor returns basis, this does not mean that professional money managers are not skillful. To the contrary, the level of professional expertise in portfolio management at most fund companies is very high. However, unlike American schools and colleges, the real-time securities markets have built-in grade and achievement deflators.
On average, the markets deliver C level returns before costs. If your costs are lower, you are more likely to get an A or B. If your costs are higher, you are more [...]