Birgit Kuester February 14, 2020 Mutual Fund
Index funds provide a static and very transparent investment portfolio. They also offer very low turnover of securities due to less buying and selling. This allows them to keep operating expenses at a minimum and usually substantially lower than their managed counterparts. The fact that they represent the entire stock or bond holdings of the index provides great diversification, which can also be a disadvantage.
For instance Morningstar gives one to five stars as ratings. The score the company first gets on the risk of the fund is what the system is based on. The performance of the fund for the previous five years is then taken away from the original rating. The reliability of this system is not very good as the performance is based on past numbers and can not accurately predict the future earnings or losses on these funds.
While both managed and index funds can yield nice long-term returns over time, I have found that if you can select the best managers in their field and allocate your assets to these top 20 percent of the fund world, you can get better returns from your fund investments. But if you are not sure whether your funds are in the top group, find out. and if they are not, you might be better off with an index fund.
The recent explosion of an oil rig in the Gulf and the resulting chaos and environmental damage tells you that any company can all of a sudden be exposed to dramatic unforeseen risk. In this case it was BP. Mutual Funds can also possess much more risk than you thought you were encountering.
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