We live in uncertain times, don't we?
Workers saving for their retirement years and other long-term goals confront a daunting list of unsettling concerns ranging from the economic repercussions from Russia's invasion of Ukraine to mounting recession fears with the Federal Reserve's tight monetary policy. Little wonder the stock and bond markets are so turbulent.
There's nothing we can do to control market movements. Instead, it's better to focus on what you can control during worrisome times, including nurturing your network, honing your job skills and strengthening your household balance sheet.
When it comes to your retirement savings plan and other long-term savings, check how your assets are allocated and continue to figure dollar-cost average into your investments. You should also keep a sharp eye on fees. Keep them low.
The "fees matter" mantra is reinforced by recent experience. An oft-told story on Wall Street is when markets are volatile, active mutual fund money managers come into their own compared to index funds (also called passive investing).
The investment service Morningstar looked at the 12-month period ending in June and found that 44% of actively managed U.S. large blend equity funds did better than their passive alternatives. A midyear scorecard by S&P Global reached somewhat similar conclusions.
The clear message in both reports is that actively managed funds fail to beat their benchmarks over the long haul. Morningstar calculates that only 11.8% of actively managed U.S. large blend funds did better than their passive competitors over 10 years and 10.4% over 20 years. (The results are especially strong among portfolios comprised of larger U.S. companies; active managers still struggle to consistently beat benchmarks over time with small-company stocks, foreign stocks, bonds and real estate.)
There are two reasons for the better performance by passive funds. The first is lower fees than charged by actively managed funds. The second is the difficulty money managers have in consistently outperforming the market.
Among the smartest minds in finance is Credit Suisse investment strategist Michael Mauboussin. In a 2017 paper with colleagues called "Looking for Easy Games," he captured the essence of why investing in low-fee broad-based index funds is a savvy strategy for the typical employee.
"Indexing makes a great deal of sense for investors who do not have the time or sophistication to evaluate investment managers," they wrote. "This is relevant for most individuals. These investors should focus on allocating assets appropriately and minimizing costs."
Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media's "Marketplace."
