We all like to think that we can beat the stock market. Investors like to think that the mutual fund managers we hire when we invest in a mutual fund can pick winning stocks. No one wants to be average. We all think that we are above average. But, Rick Ferri is here with his new book, “The Power Of Passive Investing” to show investors just how wrong our way of thinking is. In his book, Rick Ferri has laid out empirical evidence that actively traded fund investing has a very low probability of beating index fund investing. This is not a new concept. It is an investment philosophy that John Bogle has been touting for decades. The hardest part of Rick Ferri’s book is convincing people of the power of passive investing through index funds because so many people want to believe that they are better than average, better than average stock pickers, or even better than average mutual fund manager pickers. Rick Ferri’s book offers practical investing advice on implementing a passive investment strategy for long term success.
What Is Passive Investing?
Passive investing is an investing strategy that is based on the fundamental idea that the stock market as a whole, the group on investors that collectively make up the market, is better at determining the direction of future stock prices than any one individual could ever be. In order for one investor to make a profit, another one has to lose money keeping the market price in equilibrium. For every seller, there must be a buyer which makes actively trading and consistently beating the market average that much harder. Another huge benefit of passive investing is that it requires very little effort to manage the investments. Because of this feature of passive investing, transaction costs and brokerage fees are incredibly low with passive investing. That means that more money is paid out in profits to the investors when costs are low.
The Debate Between Actively Managed Funds And Passive Investing
A single actively managed mutual fund has a 42% chance of beating its comparable index over the course of a single year. According to research and studies compiled by Rick Ferri, that actively traded mutual fund’s success rate drops to 12% over 25 years. The statistics get even worse if you hold a portfolio of several actively managed mutual funds who are all trying to beat the stock market average. Ferri’s research discussed in his book, “The Power Of Passive Investing” analyzed the returns of actively managed mutual funds over the course of five years. He found that a portfolio of five randomly selected active funds had only a 16% chance of beating its stock market index. Many investors fight the mathematical findings of passive investing. It is a psychological phenomenon buried in the fact that Americans do not want to be average. Over half of all Americans think that they are a better than average drivers. Statistically, that is just impossible. The same is true in the world of investing. Investors want to think that they are excellent stock pickers or make great choices of mutual funds to invest in. But, studies have shown and Rick Ferri’s book describes just how very unlikely it is to have better returns than the stock market’s average.
My Favorite Part Of The Book By Rick Ferri
The final portion of “The Power Of Passive Investing” is one of my favorites. Rick Ferri takes the last four chapters of the book to make his case even more clearly to specific sections of the investing public. He shows individual investors, charities and personal trusts, pension funds, and finally investment advisors how they can harness the power of passive investing. In each section, Rick Ferri addresses specific details that focus on the investing requirements of that specific group of investors. The statistics and research Rick Ferri presents in the book make defending actively managed investments very difficult.
Who Would Benefit From Reading Rick Ferri’s Book?
Rick Ferri’s book, “The Power Of Passive Investing”, is a must read for the millions of Americans who still believe that they can beat the stock market or believe that they can pick a mutual fund manager who can pick winning stocks that beat the market average. I’ve always wondered, if we know that we cannot pick stocks that beat the market, what makes us so sure we can pick the stock pickers? That is why passive investing through index funds consistently beat actively traded mutual funds that charge 1% of more in expense ratios, sales loads, and other fees. Rick Ferri’s book does a great job laying out the evidence for passive investment, and the book would be a great read for any investor. If you want to read more about Rick Ferri, be sure to visit his website www.rickferri.com which is full of some great additional content, Rick’s blog, and other information.
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