Passive versus Active Index Investments in Earning Higher Returns

According to a documentary by Tim Armour on 27th February 2017, Warren Buffett’s decision to invest in an S&P 500 passive index fund is better than investing in mediocre and expensive funds. This is because the passive fund low cost and simple investment that can be held for a long time.

According to his annual shareholder letter, Mr. Buffett explained that his approach was that of bottom-up investing, that Americans needed to adopt for retirement. This was from experience based of fund on his many years of investing.

Tim Armour adds on Mr. Buffett’s argument that many mutual funds provide poor long-term returns due to high management fees and excessive trading involved. Another reason for the poor returns is the risk of volatility and opportunity cost of investing in passive index investments.

According to Tim, the actively managed funds are doing badly in the market, but there are, however, sometimes when this is exceptional. A client investing in active funds can be wealthier after some time as compared to the one who invested in a passive fund for the same time. There is, however, a way to tell which fund between the two can outperform. The investor should choose the fund with low expenses and high manager ownership. The investing time should be long to get good returns.

Timothy Armour further posited that, as many young Americans are retiring at a tender age and getting worried about how to save for their golden years after retirement, there is need to do further research to find out on how investors can earn higher returns for their future.

About Tim Armour

Tim Armour works at the Capital Research and Management Company as the Chairman, Principal Executive Officer, and the Director. He assumed this position in the year 2015. He is also the Equity Portfolio Manager at Capital Group Companies.

Previously, Tim Armour worked at Capital as an Equity Investment Analyst. Armour joined Capital in 1993 where he worked under the associate’s program. Mr. Armour has a Bachelor’s degree in Economics from Middlebury College in Los Angeles. Tim has been an investor for over 32 years.