Buying index funds is the best way to generate long-term wealth from the share market, Wall Street expert, author and professor Burton Malkiel said.
“Index funds over three years have beaten 60 per cent of average [United States] managers,” Malkiel said at a conference in Sydney last Friday.
“And over 10 or 20 years, you find that 80 per cent of active mutual funds in the US were beaten by a low cost index fund.”
An index fund is designed to replicate the performance of a benchmark such as the S&P/ASX 200 or the Dow Jones Industrial Average.
The figures in his speech were compiled by Lipper, Wilshire and the Vanguard Group for the periods ending December, 2007.
They showed that a US-based S&P 500 index fund has delivered 11.82 per cent annually for the last 20 years, compared to a 10.83 per cent yearly gain from the median US equity fund in the same period.
Malkiel said it was much easier buying index funds because trying to find a good fund manager is “like a needle in a haystack” and he would rather “buy the haystack itself.”
He also urged investors to never try and time the market.
“When everybody is optimistic, it is so easy to say ‘boy this time is the time for me to go in and put more money into the stock market’,” Malkiel said.
“And when everyone is pessimistic then that is exactly the time that people tend to take money out of the stock market.
A good technique was to use dollar cost averaging, a technique that invests money consistently over time including when the stock market falls, so when the market recovers the portfolio will beneift from the upswing, he said.
