In 2008, Warren Buffett made a $1m bet that a low cost S&P index fund would out perform five hedge funds backed by his opponent, the New York wealth manager Protégé Partners.
Buffett is winning, handily.
His index fund is up 44% against just 13% for the hedge funds (after all fees). The ten-year bet still has four years left to run.
As if more proof were needed, why pay someone else to toast your bread?
Well, take this crumb — the Financial Conduct Authority has just revealed that three quarters of financial advisers in the UK fail to properly explain their charges to clients.
New standards were introduced at the beginning of 2013 banning advisers from taking a commission from the policies they sell. A good thing, putting an end to the potential for conflicts of interest.
Any charges must now be clearly illustrated — with up-front information on the cost of advice and any extra charges detailed. But the problem is, that’s not happening; firms aren’t abiding by the rules put in place, and consumers are being taken advantage of.
The regulator called this a “wake-up call” for the industry and two companies could face punishment.
Avoiding ‘hidden charges’
If you buy an index fund instead, like a FTSE 100 (FTSEINDICES: ^FTSE) tracker fund, you’re essentially buying a small share of leading UK businesses. This is attractive for a number of reasons.
Firstly, it’s cheap, and long-term index funds tend to do better than many other types of fund, as we’ve seen in the example of Buffett’s bet.
An index fund is devoid of emotion; it won’t panic, or act irrationally, unlike its human counterpart managing a fund. Hence why the results tend to be better.
Secondly, you won’t get hit by those hidden charges. In figures published in The Telegraph, add-on fees in actively managed funds could result in charges of up to 4% a year. You might not know it, but you could be paying performance fees, or charges for admin and marketing.
There are people who will argue that you’re only backing ‘yesterday’s winners’, and you can’t beat the market with an index fund. But that’s besides the point. Most professionals can’t beat the market.
DIY Investing
Full disclosure: there are also tracker funds that perform badly (just as there are fund managers who are exceptionally talented).
Indeed, it’s essential you shop around.
Another option is doing it yourself — by having a go at stock picking. You might think that given the pros mostly fail to beat the market long term, ‘what hope do I have?’
It’s a difficult challenge, but if you’re thinking of your retirement, then you’ve got decades to weather potential market volatility.
