Frugal Librarian #21: YOU: Power broker

Another financial tip the new book, New Frugality.   You’re smarter than a wall-street money manager.

Index funds duplicate the performance of a particular stock market index.  The most famous equity index fund is the S&P 500.  It is made up of stocks of the 500 largest publicly traded U.S. companies.  They’re on that list because they are the 500 BEST COMPANIES!

“Indexing is commonly referred to as passive investing.  No professional money manager is trying to beat the market, rapidly buying and selling stocks. Yet index funds routinely outperform most actively managed funds.  Why?  A big advantage is their low cost.  The annual fee for investing in the S&P 500 is some 0.10 percent versus an average of almost 1.5 percent for actively managed funds.  Index funds have no research analyst costs or multimillion dollar money manager salaries to pay.

Mark Kritzman of Windham Capital Management simulated an imaginary investor using index funds, mutual funds, and hedge funds.  Index funds had the highest rate of return at 8.27 percent, since the actively managed mutual fund’s costs are 3 times higher, and the hedge fund six times higher.

According to millionaire philanthropist Robert Wilson, “I’d say as a general rule put it in index funds.  I don’t see why small investors should horse around with money managers.”

Oracle of Omaha

If anyone could time the market, we’d all be millionaires, right? Well we’re not, but one fairly accurate economic indicator are the words out of the mouth of Warren Buffett. He clearly knows what he’s doing.

So if you suppose you too can buy low and sell high, you don’t need to hand your wallet over to a broker in return for $20 commissions. If you’re interested in cutting your teeth, there are places where you can create small accounts with trade commissions of a few dollars. A great book to learn more is Investing Online for Dummies.

Or, an even lower up-front expense is creating a virtual account at Icarra, Zack’s Simulator, Bullpoo, Marketocracy, Hedgestop, or Investopedia to see how sharp you are with play money first. Then if there is another recession (let’s hope not) you’ll be ready.