Investors do better with a hands off approach

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Investors do better with a hands off approach
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Investors, do you think you can time the market, play the market and beat the market? There’s an easier way that yields more profit, according to a respected new study.

There are always investment advisors or newsletters you may see that promise they can time the market or pick the best stocks for you. And then there are mutual funds that claim they use strategies that supposedly outperform the market. The truth is that’s really hard to do. Sometimes being really smart with your money means realizing you can’t beat the market.

S&P study favors index funds

New data from Standard & Poor’s shows that if you put your money in an index fund in 2011, you would have done better 84% of the time vs. if you were having your money actively managed. Now, maybe that’s a fluke. Maybe there’s something about that year, right?

Wrong. The S&P study is back-tested over 10 years. So if you go back five years, 61% of the time you’d do better with an index fund vs. actively managed money. Go back 10 years and again there is a similar finding.

You’re paying a lot of money for a ‘professional’ to manage your money. The reality is you would do better just riding along with market, unless you want to do constant research and make investment decisions based on that. But that approach is at least like working a part-time job. It’s certainly not for everybody.

Low expenses are king of the investment world

So I come back to the idea of keeping your investment expenses low as a key to building long-term wealth. Today, the fastest growing area of investing is exchange-traded funds (ETFs) where you buy slices of dices in U.S. markets or overseas markets.

With ETFs, 99.9% of the money you put in goes to work for you in that investment. On the other hand, if you invest with a money manager, you might have only 98 cents going to work for you.

Over time, paying those investment gurus to pick stocks for you costs you money instead of making you money. That’s not just my opinion. It’s now shown to be fact.

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Clark Howard About the author:
Clark Howard is a consumer expert whose goal is to help you keep more of the money you make. His national radio show and website show you ways to put more money in your pocket, with advice you can trust. More about Clark
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