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Who killed stock picking?

The last decade we have seen some pretty big moves in the market. Many investors were burned by the dot-com crash, and even more watched their portfolios crash during the Great Recession. The volatility we have seen in recent years has taken its toll on investors, who are increasingly moving away from stocks and actively managed mutual funds and shifting their attention to index funds and ETFs.

The main advantage to using ETFs and index funds as investing tools is the lower volatility. Yes, you will experience ups and downs, but they will be relatively in-line with the broad market, which will always have a lower volatility than a small number of individual stocks. The top rule to successful investing is diversification, which that is why ETFs offer a more acceptable level of volatility than mutual funds, which while diversified are often much less so.

Lower volatility is not the only reason investors have turned their attention towards ETFs. Some ETFs charge less than 0.1% of assets a year. When compared with the 1% that many mutual funds charge, the savings are enough to catch people's attention. 

And then there is the matter of performance. Mutual fund managers want you to believe their professional experience picking stocks gives them an advantage over the overall market, but that is not always the case.

According to Morningstar, mutual fund managers that ran funds focused on large cap stocks earned their clients a return of 15.3% last year. Not too bad, but it failed to match the 16.4% return that similarly based ETFs gained during the same time period.

 

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.