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  • From an early age, we're taught to celebrate winners.

  • Look up to champions.

  • Revere Gold-medalists.

  • We make fun ofparticipation trophies”.

  • I mean, when was the last time you heard somebody bragging about having a few dozen followers

  • or a perfectly average salary?

  • So how do you explain the explosion in popularity in an investment tool that offers nothing

  • more than a guarantee of average results?

  • Nothing fancyjust average.

  • Strange as it might seem at first glance, the meteoric rise of theIndex Fund

  • is a lesson in how sometimes, aiming foraveragemight be thebeststrategy of all.

  • In an earlier episode, we explained how mutual funds offer numerous benefitslike low

  • share prices, broad diversification, convenience, and ease.

  • Their debut in 1924 ushered in a golden age for active portfolio managers.

  • Professional investment management was suddenly no longer just for the ultra-wealthy.

  • The American middle class poured their savings and retirement accounts into mutual funds

  • with abandon.

  • Today, with nearly 10,000 mutual funds available, it can look like a Cheesecake Factory menu,

  • endlessly long and complicated.

  • So most fund managers compete to deliver the maximum amount ofalpha”.

  • That's just investor-speak for how much BETTER the portfolio manager did than the

  • market average.

  • The way managers measure their success is by comparing their returns to anindex”.

  • An index is a hypothetical portfolio that represents a segment of a financial market.

  • For example, the S&P 500 index measures the average stock gains or losses of the 500 largest

  • companies in the US.

  • There are indices for virtually every type of investment all across the world: precious

  • metals, oil, bonds, even a pork carcass index.

  • Their main use is as a comparison tool.

  • For a long time, trying tobeat the indexwith your mutual fund made sense to most investors.

  • I mean, who would want to put their money with a fund manager who charged expensive

  • fees but failed to beat the market most of the time?

  • But then, a dirty little secret was uncovered.

  • Most professional fund managers consistently fail to meet-or-beat their index by a wide margin.

  • One study found that, 90% of active-fund managers did worse than their relative index.

  • And these are supposed to be the best of the best with Ivy league educations, decades of

  • experience and sophisticated trading tools.

  • There are a few factors that make it difficult for fund managers tobeat the market”.

  • The first is fees.

  • Actively managed mutual funds employ teams of researchers, analysts, and traders.

  • That costs money.

  • And you, the investor, end up paying for it.

  • Actively managed funds have annual fees on average of around 1.4%.

  • In other words, your mutual fund has to make 1.4% per year just to keep you from LOSING money!

  • A second key factor is that humans are really really bad at telling the future.

  • In the 1973 book, “A Random Walk Down Wall-street”, Burton Milkier suggested that investment markets

  • are too complicated and, well, random, to be consistently predicted.

  • Researchers found that you'd do just as well picking stocks blindfolded as you would

  • giving your money to a portfolio manager.

  • No seriously, in a contest run by the UK Observer, professional portfolio managers tested their

  • skills against the stock-picking prowess of a cat named Orlando.

  • Orlando shredded the pro's.

  • Milkier suggested the creation of a new, low-cost mutual fund that simply buys the hundreds

  • of stocks within the index, and doesn't jump from stock to stock, trying to beat the

  • market.

  • That sounded like a great idea to a guy named John Bogle.

  • In 1975, he launched Vanguard's “First Index Investment Trust”.

  • No more promises of beating the marketthe only guarantee was that your investments would

  • do slightly worse than average (since even index funds have minimal fees).

  • Sound a littleunderwhelming?

  • Yeah, it did to investors at the time too.

  • The fund was ignored - or outright mocked - for years, and many thought it wouldn't

  • survive.

  • Spoiler Alert: it did.

  • Over the last half-century, more and more investor's started wising up and today Index

  • Funds and Index ETFs are more popular than ever with nearly 7 trillion dollars resting

  • in index-type funds.

  • It seems the promise of consistentlyaverageresults doesn't sound so shabby to investors

  • any more.

  • This is also thanks to the investing GodfatherWarren Buffet.

  • In 2007 he made a million dollar bet with the world's best hedge-fund managers that

  • they couldn't out-perform an S&P 500 Index Fund over a 10 year period.

  • And wouldn't you know it, despite weathering the 08 crash, the index fund trounced the

  • hedge funds, averaging an annual 7.2% return, compared to the hedge funds measly 2.2%.

  • Now, to be clear, index funds are not theperfect investment.''

  • There is no such thing.

  • But Warren Buffett famously quipped that Index-Fund investing is the best move for 99% of investors

  • out there.

  • So if you decide to join the club, start simple and don't forget to diversify!

  • For example, a basic blend of three broad indices would allow you to diversify into

  • a huge spread of countries, companies, and asset types.

  • Index funds are available through most fund-companies and can be bought within a retirement account

  • like an IRA or 401k.

  • And unless you're a seasoned investor, speaking to a professional to set an ideal blend is

  • a smart step.

  • There are also onlinerobe-advisorservices that can automatically make the blend for

  • you, based on your goals and risk tolerance.

  • So next time your momma asks if you're doing your best, sayactually Warren Buffet says

  • that I should just strive to be average!

  • She'll be thrilled.

  • And that's our two cents!

  • Hey guys! It's Philip and Julia again.

  • Question: How can you make your favorite meals even more delicious?

  • Add a dash of science of course.

  • Serving Up Science is a PBS Digital Studios show hosted by history buff, science writer and foodie

  • Sheril Kirshenbaum who is serving us science backed answers to all of our biggest food questions such as:

  • Should you let your meat rest?

  • What's better, wild of farmed salmon?

  • What makes blue cheese so stinky?

  • Ah! I think you mean delicious.

  • So, head on over to Serving Up Science and tell them Two Cents sent you.

  • We'll be nerding out right along with you.

  • What else would you like to know about Index funds?

  • Ask your questions in the comments section.

From an early age, we're taught to celebrate winners.

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インデックスファンドとは一体何なのか? (What The Heck Is An Index Fund?)

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    Capalu に公開 2021 年 01 月 14 日
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