Investing: Exploring the Performance of Actively Managed and Index Funds

Ready to pull back the curtain on the mysteries of investing in public mutual funds and index funds? You're in the right place as we tackle the complexities of active and passive fund management. We guarantee you’ll gain a deeper understanding of how these funds operate, their associated fees, and the significance of clear investment goals. 

Now, let's talk about the lifecycle of actively managed funds. We'll examine real-life examples, such as the Russell 1000 Large Cap Growth Index, Morningstar Large Cap Growth Trust, and Vanguard Large Cap Growth Index, over fourteen 10-year periods since 2000. Plus, we’ll dissect the performance of six randomly selected funds over a decade and a half. You'll learn how the sequence of returns impacts performance and why it's crucial to grasp the implications of holding onto an underperforming fund.

Toward the end of the episode, we question why financial institutions are promoting index and passive investing. While it may seem like a one-size-fits-all solution, we challenge this notion and reveal how these institutions profit from investors, regardless of performance. We urge you to question what you’re told and conduct independent research for the best investment outcomes. If our conversation sparks questions or disagreements, visit ditchthesuits.com and let us know.

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Thanks to our sponsor, S.E.E.D. Planning Group! S.E.E.D. is a fee-only financial planning firm with a fiduciary obligation to put your best interest first. Schedule your free discovery meeting at www.seedpg.com

Ditch the Suits is produced by NQR Media. NQR also produces the One Big Thing Podcast with Steve Campbell.

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Transcript

Speaker 1: 0:08

Welcome to Ditch the Suites, a movement, awakening and opportunity for you to start getting more from your money in life. I'm Steve Campbell. With my amazing co-host, Travis Moss, we're going to share industry insights nobody wants you to know about, so buckle up and enjoy the episode. Well, welcome back to Ditch the Suites, steve Campbell and Travis Moss.

Speaker 1: 0:29

Folks, I'm going to ask you to do me a favor with this episode. We're about to throw a whole lot of numbers and figures at you. You might be the kind of person that can drive in your car and listen to these, but let's do a little mental exercise. Can you guys head over to NQR YouTube channel that's NQR and watch along with us, because maybe you actually want to write down some of these things that Travis is going to share. If you get over to NQR on YouTube, don't forget to smash that like button, as we'd love to get this information into more people, but we're going to get in a whole lot of numbers and figures.

Speaker 1: 1:02

Folks, mentally, brace yourself, for I think some of the information that Travis wants to do to not only challenge the way that you think and this is what I love about doing business with him he not only wants to challenge the way that you think about things, but then also provide context and actual evidence as to how we got to this frame of reference. We've been leading up to this episode. Now we want to walk you through maybe some of the performance stats that can back up maybe some of what we've said. Yeah, that's who? Bud?

Speaker 2: 1:37

You'll have to cut that short because I didn't know that was me.

Speaker 1: 1:40

I didn't know what we were doing there. Brian, that's a cute one.

Speaker 2: 1:44

Who else is it? Normally you have a question. Normally you say something I didn't know you were talking to me. Okay, this is actually pretty funny. I think we're talking about performance stats, right? Yeah, we'll splice it. You want to splice it or you just want to keep going, we'll see.

Speaker 1: 2:01

You can just keep running, all right, steve.

Speaker 2: 2:05

Let's talk about performance stats. We were promising we were going to get to performance According to a statistic. So this is a website think tank place. They do lots of statistics and I think statistics can be they can be awfully manipulated, but this is just stuff that I Googled. It. I was trying to figure out active versus passive performance and studies and whatnot. So in 2022, according to the statistic, there were 6,585 actively managed public mutual funds in the US and there were 517 passively managed index funds in the US.

Speaker 2: 2:43

So I believe that they're talking about the actual funds and not the share classes, because you might say, well, there's 20,000 something on mutual funds out there, so where they come up with 6,500? Well, there's a thing called share classes and these are different types of funds that you can buy under different scenarios. Some of them have commissions built in, some of them have higher fees, some of them have lower fees if you have more money, and they're all designed for different reasons. So one of the challenges when you're comparing mutual funds to an index is sometimes the platform fee is built into the mutual fund, so the platform fee might be, for instance, the cost of running the 401k plan at work, and so there's an extra 15 basis points built into the mutual fund to pay the investment company for managing the 401k plan. Well, if you didn't pay the 15 basis points, it would give you a bill for the 15 basis points anyway. Somebody's got to pay it. So sometimes these share classes that will fail the comparison to the index. They've actually got fees built in because it's covering other expenses. So we actually need to get to the heart of the core fund itself so you can buy funds a lot of different ways. And so they will say well, a big reason why funds underperform the index is because of their fees. Right, but there is no such thing as a free lunch. If you're getting help, there's a cost to it. That could be a commission, it could be an investment manager charge, it could be a 12B1 fee. There's all different sorts of fees that could be built in there. But conversely don't be fooling yourself there are fees in the ones. Even with lower fees, there's other fees in those funds. Those companies make a lot of money. They're not stupid. I mean, they just figured out how to put fees in there that aren't some of the discloseable fees, let's say, or easily findable fees. So anyway, according to the 6585 actively managed funds and 517 passively managed funds. So those are your indexes, passively managed index funds.

Speaker 2: 4:48

So again back to a question we left off last time how many of those funds were actually trying to beat the index? That's my first question, because you should take those funds out. If their investment strategy was not to beat the index, you should take them out. Somebody would say, well, I can't believe somebody wouldn't be investing to beat the index. I can't believe that. Most people don't like to go up and down, most people don't like a minus 40% year. So you might buy a fund that's like, hey, we invest in S&P 500 stocks, but we do it in a way that we don't want to drop so much when it crashes. So first you'd have to take out the funds that really they're not trying to beat the index, because every fund actually has a mandate and you can actually find this in the mutual fund perspective. They will actually tell you the things that they can and cannot buy and how they're trying to buy investments, like what's their strategy for, what's their end goal. And so people all out there is coming and go. I just want to invest to make a lot of money, but what's your goal with it? Make a lot of money? That's undefinable. What's the actual goal? So which index are they actually categorized against too? So you could come in and say, okay, there's 6,585 funds and we're going to group those up and compare them to an index, but how do you choose who to index them to?

Speaker 2: 6:09

I've seen funds that end up in the wrong indexes. We have software that does analysis on funds. This is industry leading third-party software, and it constantly will have funds that drift between the classes, but then they pull the historic performance with it. So you have a fund that drifted from a growth fund to a value fund, because, again, the investments are changing around in there, so it's not actually what you think. But so they go from a value or growth orientation and they're being rated against other growth funds, and then, all of a sudden, that performance shifts over to the value category and now they're being rated against the value index. It's like wait a second, but that shift happened last year. You got to rate them for the previous time against the other index and then the forward-looking time against the new index. That's not what we do, though. Even then, which index particularly are you investing or comparing them we talked about and we're going to get into the statistics the actual index funds themselves.

Speaker 2: 7:07

So if I take an index fund, if I take a small cap index fund, I could buy four different small cap index funds that have four different results. So which small cap index fund am I comparing it to? Because I can't actually go buy the index. I have to buy a fund that buys the index, or I have to hire somebody to build the index for me with some technology. So I can't actually go and buy this magical index. I have to buy the representation of it. The representation of it. Yeah, which representation am I buying and which representation am I actually comparing to that? Actively managed funds. So think about it like this let's say that there are five small cap indexes and there are five actively managed small cap growth funds.

Speaker 2: 7:53

Or small cap funds. Let's just say let's leave the growth and value out, just say that they're overall, just investing in small cap. So you got the index investing in small cap and you got the actively managed fund investing in small cap. So you've got these two funds, two groups of funds, doing the same thing In the index fund. You have a range of performance. So you have one index fund that's plus 10, all the way down to the lowest one is plus 5. So the 5 percent spread between them. Then you have growth funds, and one of the growth funds is plus 10, and one of the growth funds is plus 5.

Speaker 2: 8:27

Which ones are you comparing? Because that growth fund, that one growth fund, beat all five indexes. In fact, four of the five growth funds beat at least one of the five indexes. But if you only take the top performing index and say four out of the five growth funds did not perform well, that's disingenuous. You're lying about this. If you only take the best, then what you'd have to say is we looked at only the best, we looked at the top 10 percent of each category and this is how the top 10 percent performed against each other. Only if it's a fair fight, only if the group of actively managed ones were actually trying to beat them in the first place. If I don't want to fight you and you sucker, punch me in the back of the head, you can't say you beat me. That's essentially what's happening with these analysis.

Speaker 1: 9:20

Well, and I think the only thing that brings maybe all these mutual funds together is from our last episode. They probably all had a college roommate that was always trying to eat the food that they brought home, right? So what we're talking about is, I think, some of the confusion that maybe people have when it comes to investing in mutual funds, that the stock market is really just a marketplace and there's buyers and there's sellers, and so I think, trying to sift through what's the best of the best or what's the right path for you, understanding that even if you've done your due diligence and selected a fund or an index that you think is your best fit, there is somebody on the other end that, when they panic and sell, is going to affect your mutual fund. So I think this has been a really interesting dialogue over these last few series to help people understand that you're truly only buying representations or replicas of what an index is supposed to be. So hit us with maybe some more stats. Help us understand, then. How are we kind of comparing these things?

Speaker 2: 10:17

Well, morningstar's got some more stats. Morningstar, and you can just Google this. Morningstar pops up first. According to that, 45% of public mutual funds beat their index in 2022. So remember public funds. They get back to the public word.

Speaker 2: 10:32

Public funds are all the ones with the tickers. We're talking about this group of 6,585. Or, if you want to include all tickers, maybe they're including all tickers, the whole 15, 20,000 mutual funds that are out there, right? But there's hundreds of thousands of active investment managers out there, so we're taking a very small representation. Remember what that small representation was doing. They have a watered down, actual, real portfolio. They don't manage a portfolio for you based on your cash flow. They manage a portfolio based on all the crazy, stupid things that other people are doing, right? So your roommate eating your food, basically, is what's happening there.

Speaker 2: 11:13

But let's look at that 45% of public funds beat the index in 2022. That means that there was 2,963 funds that beat the benchmark. Remember, I'm just going by the 6,585 funds back from Satista. So that means that 2,963 funds presumably did better than 517 funds. So you could say, well, the majority didn't beat them. Well, the majority is a lot freaking bigger when you're talking about actively managed funds. You're telling me that you can't figure out a 2,963 funds, the difference between good and bad. If you actually again, if you understand what you're looking at.

Speaker 2: 11:54

The problem is most people don't understand what they're looking at. So they're saying, when they say, like the majority of funds don't perform or beat the index, it's like well, okay, what's the group that isn't even trying to beat it? How are they grouped up? But then again, even the minority is bigger, is a very big number. I mean, you got 2,963 chances there that you could have picked a winner, essentially, and there are ways to look at it and figure it out. Believe it or not. They try to tell you there's no way to figure it out. There are ways to figure it out. I want you to think that there's no way to figure out, because if you think that there's no way to figure it out, you won't leave me. It's like if you're in a relationship with somebody and all they do is tell you how ugly you are all the time, because you're really a beautiful, wonderful person, and all they do is beat on you because they're afraid of losing you to the world out there. That's what you're getting with this echo chamber Over the last 20 years and this shows up everywhere over the last 20 years, less than 10% of actively managed funds have beaten the market.

Speaker 2: 12:58

So again, 10%, though, is 658 funds. I've seen it as low as 7%, maybe even 5%. You kind of wonder where they're coming up with the numbers. Here's the thing, though Mutual funds actively managed mutual funds have a shelf life, so we talk in like, if I look at a fund and it's in the bottom 100th percentile and it's been there for the last five years, why the heck would I even bother with that one, right? But one of the things that happens with mutual funds is, like I said, it starts out a certain way, and then money comes into it because it's doing good, and it kind of takes it to a different phase, if you will.

Speaker 1: 13:41

I want to share one thing, just so we don't lose it. You can correct me if I'm wrong. I think this is a cool point. Again, folks, I'm just looking at these notes so it's real as Travis is talking about it. He had mentioned, based on the statistic, that there's over 6,500 actively managed funds in over 500 passive funds. If you read a headline that says that only 10% of active funds outperformed, that number is still 658. I am not a mathematician, but 658 is larger than 517. So if you actually peel back the onion, 10% outperformed even more than the only active amount of passive funds that are out there.

Speaker 2: 14:20

Well, a very good point there, because it's not 517 different indexes, it's 517 different index funds.

Speaker 2: 14:27

So, 517 funds, but they don't tell you how many of those 517 index funds actually outperformed their own index. See, they're missing something here. They're not grading one half of the class or not. In this case, not one half of the class, but one section of the group. They're not grading the index funds and saying how many of those index funds are outperforming the index. They're just saying the active funds they're not outperforming. And even when you come down to that, there's still more than a one-to-one ratio of ones that are outperforming. But let's go back to that whole 20-year thing and I forget the point that I was trying to make. But yeah, that was a pretty nice little pause period there. I find that very interesting. Time periods are sneaky. All right, let's talk about time periods for a second. Let's take it down to 10-year time periods, because the statistics are pretty similar between 10 and 20-year time periods. It looks pretty bleak for actively managed funds. Oh, that's what we were talking about.

Speaker 2: 15:31

Let's go back one quick second the lifecycle of an actively managed fund. Actively managed funds get merged all the time with other funds because, let's say, the portfolio doesn't get big enough enough people don't buy into it. See, an index fund can sit there indefinitely. Nothing's going to happen to it because they're buying the exact same stuff. It's formulaic An actively managed fund if it doesn't get enough growth, the manager's moving on someplace or they're getting fired. There's stuff that's going on there. Actively managed funds are consistently being consolidated or changing investment mandates or stuff like that.

Speaker 2: 16:05

When we're looking over a 20-year period, we're primarily talking about in one group, the index funds never change essentially the formula. The other group is a changing formula. There are material things changing that. If you knew that they were changing, you might make an alternative. You would go from option A to option B. We're not even being honest in the fact that one is a stagnant and one is actually in motion. Because it's in motion, you would be forced to make decisions that you otherwise wouldn't have made.

Speaker 2: 16:41

All we're doing is saying see, they failed. We told you. It's like you're helpless, you're just sitting there and you're like I'm in the highway. Go ahead and run me over Instead of just stepping aside and saying, okay, maybe I shouldn't be here, maybe I should go do something else. But the 10-year time. Back to the time periods. 10-year time periods, real-life example I pulled performance for every 10-year time period since 2000 for the S&P 500, for the Morningstar Large Cap Growth Trust, which is their large cap index. For the Russell 1000 Large Cap Growth Index. For the Vanguard Large Cap Growth Index. For the Growth Fund of America picked it out of a hat just because a lot of people know American funds.

Speaker 2: 17:18

It says growth funds. You have an idea of what it's doing there. It used to be a very good fund but then it got really big and it started to fizzle out a little bit. But we'll see how those numbers look. I pulled stats for the JPMorgan Growth Fund, which right now is a very good fund. But again it's kind of following that arch the career arch of the American Growth Fund. There are 14 10-year time periods since 2000. 2001 through 2011, 2012, or two through 2012, and all the way up to 2023. There's 14 time periods. I compared the performance of all these time periods. I started with the growth indexes. I just started with the Russell 1000 Large Cap Growth Index, the Morningstar Large Cap Growth Trust and the Vanguard Large Cap Growth Index.

Speaker 2: 18:06

Interestingly, morningstar, when I look at the 10-year performances, the rolling 10 years, they were the worst performer 10 out of 14 times 10 of the 10-year periods, they were the worst out of 14. They were the best performer three times. They were in the middle there someplace. Once, when they were the best performer, they did as much as a half a percent better per year over the decade. That's pretty significant. When they were the worst performer, the worst that they did was 8.19% worse than the top performer. These are indexes just in the same category. You've got this massive spread within the indexes. If you're comparing yourself to an index, it's probably easy to beat Morningstar in the year that they did 8.19%. When Morningstar then does better, do you switch to the Morningstar index and compare yourself to that? Is our actively managed funds going to be compared to the Morningstar index? Are they going to be compared to the Russell 1000 index? Are they going to be compared to the Vanguard Growth Index? I don't understand which one to actually compare them to.

Speaker 2: 19:16

Personally, in the time periods of 2008 to 2009,. That crossover, I think that that would take you to 2018 and 2019. It's those 10-year cycles. They went from worst to first. They went from the worst performers to the first performers. They were on this terror of being the worst fund out there. They were the best fund for the next three years in a row. They had been the worst fund for nine years and then the best fund for three years.

Speaker 2: 19:46

Even if you like to buy indexes, if you're like I, like passive investing, I don't have to think which one do you buy? They were a loser forever. Then they were the best, isn't that active. This is a little bit confusing. The Russell 1000 index, the Russell 1000 Growth Index it was never the worst and it was the best five times. The biggest variance is 1.5% downside. When it missed, it missed by as much as 1.5%. When it won, it won by as much as 2.6%. That sounds a little bit better than that Morningstar one, right? Yeah, okay, what about Vanguard? Vanguard Growth Index? I only picked three. There's 517 out there. There's a whole bunch of them in this category. The Vanguard Growth Index has been the worst four times. They were actually worse four times. They were also the best six times. When most people think about index investing, they think about Vanguard. They were the worst six, four times. They were the best six times. Big swing and mess right there.

Speaker 2: 20:49

You're either worse or you're best. The biggest variance is 2.6% on the downside and 1.5% on the upside. Interestingly, it was the worst of the three in four of the past five years. There's no pattern to this, even with the index funds.

Speaker 1: 21:13

We're going to stop right there to hear a word about our sponsor. We're here to help you get the most money in life as host of this show. But that doesn't just happen. You need good financial planners that have your best interests in mind. That's why we want to take a moment to talk about Seed Planning Group. Seed Planning Group is a fee-only financial planning firm that has a fiduciary obligation to put you as your consumers best interests first.

Speaker 1: 21:35

If you're not sure if they're the right fit for you, we would encourage you to head over to seedpgcom. That's seedpgcom. Fill out the contact us form and schedule your free discovery meeting, because you could be one good decision away from getting the most from your money in life. Well, because if you read those same numbers but you replaced it with the word equities or stocks, people would be like well, that's not good. But because we've been taught to believe that indexing and passive investing is a quote unquote safer way. Revealing those statistics helps you understand that when you're comparing it, the numbers aren't revealing or aren't following the train of thought.

Speaker 2: 22:18

Yeah Well. So I took it once that further because of course I'm a smart ale, of course, of course and I'm going to push some more buttons when we added the two actively managed funds and again completely randomly picked them out of my brain. We could do a much bigger and you should challenge on this study. It is not a broad enough study to prove anything right, but neither is the garbage you read and online Yep. It doesn't matter how fancy the math formulas are, they're full of subjectivity. So I put two actively managed funds in there and I put the S&P 500 in there. And I just put that in there, because who's to say you should buy growth or value? Nobody knows right. Who should say you should even own growth? I don't know. At least the S&P 500 is going to have both growth and value involved. So I said it'll just be interesting how to do. So. I added those three to our other three funds. Now we have a pool of six funds to score everybody.

Speaker 2: 23:16

Growth Fund of America started out number one of all the funds from the time period starting 2000 through 2004. And that was about it. So they were number one from 2000, 2001, 2002, 2003, 2004, for those rolling decades, so ending in 2014, they were the best fund in the study here. After that, they were the worst five times, and they were the second worst three times. Biggest variance on the downside, though, was only 2.5%. So this is compared to Morningstar too that Morningstar fund, right. So the biggest variance on the downside so this is from the top fund to the bottom fund was only 2.15%. That's a lot better than that Morningstar fund.

Speaker 2: 24:02

That index fund went in and missed. In fact, the Vanguard growth fund was 2.6. On the downside Wait, I thought that there's this big difference and the biggest variance on the upside 10.5%. Where was that with the indexes? I don't see that anywhere with the indexes 10.5%. So when it won, it won big, really big.

Speaker 2: 24:27

There's a thing called sequence of return. It does matter. You can actually make less average return and end up with more money depending on when you get the big years. So it does matter how this stuff plays out. And so, in reality, most people own these types of funds. Even if you have an advisor, most of them just tend to hold them. Even when something's changed in the fund, they still hold them.

Speaker 2: 24:56

Somebody who's aware there are ways to look at these funds. Somebody who's aware is going to look at that fund, maybe after the first one or two years, where it's taint, and say maybe we should make a change, something's changed with the fund. Or do we go oh, it's unexplainable, nobody can figure that. It's like the weather. We just can't figure it out. We're just going to sit here and burn. What is going on here that nobody looks and says? And that's the difference between having a good advisor and a lazy, ignorant, naive or stubborn advisor Like, hey, I know we love this fund.

Speaker 2: 25:34

It was great for 23, or what would it be 14 years in this example? But it's not what it was because something's changed there. Maybe you get hammered for a year or two, maybe you go from best to worst for a year or two, but you can make a horizontal move. You can go out there and say what was it about the fund that made it so good in the first place? How do we mimic that now going forward? And there are actually tools out there that people can buy, that can foreshadow some of this stuff. They don't promise performance Nothing's ever guaranteed but there are ways to look at this stuff and figure out what the heck you're buying.

Speaker 1: 26:08

Maybe the hard part, travis, for people is. We've talked about price and value and when it comes to investments, unless you just completely sell out, you don't experience that loss in a day. So for most people these are just numbers on a piece of paper someday that represent a future value of what they'll have. But if you, in your standard cash flow, had something there for three years, just depleted your cash, you would probably do something different. But because the immediacy or the impact isn't as severe, we don't, when it comes to our investments, look at it that way because it's not impacting us today.

Speaker 2: 26:49

Well, we make a very dumb decision and we get this statement all the time I can't change my investments because they're down. Yep, okay, we're mixing up concepts. You should not sell an investment that's underpriced and otherwise perfectly suitable investment. You should not sell it because it's underpriced. That's when the price is down. But if it's down because something is broken, you need to make a horizontal move. You need to say, okay, so if the whole market's down, that's one thing. It's easy to move. Because something's down 10%, you can sell that and buy something else that's down 10%. But let's say that you're down 10%, but something in there is actually fundamentally broken and everything else the worst it is is down 5%. Do you wait until you catch back up, which may never happen or do you say, look, I have to eat the 5% loss and make a move because I can grow faster in that other fund and recover my 5% faster. Yep, we don't understand what we own. So it's hard for us to jump to that conclusion. But that's the job of a good investment manager and that's what you don't get necessarily when you're buying these mutual funds, which you do get when we talk about privately managed funds, privately managed portfolios and stuff like that, and we talked about rich people. That's not all that we're talking about, so I'm not giving away what we're going to talk about. When we get to, what are the rich people doing different?

Speaker 2: 28:22

But there's one more fund I want to talk about the JP Morgan Growth Fund. You know that was the best fund of all the funds. Five times, so five times it beat everything. It beat all the indexes, it beat American funds, it beat the S&P 500. Five times in this cycle here, this 14 times cycle, nine times it was the second best. Now American funds, they were the first. They were in first place five times. So that means our active funds were in first 10 times out of 14. And now it shifted. Yes, it did. It's a different fund, but so did the indexes. Right, the indexes were all over the place. It was third three times. So out of 14 10-year periods, 14 decades, basically it was in the top three 12 times and it was never the worst fund ever in the entire time period the 23 years or yes, I think it's 23 or 24 year time period Never the worst fund.

Speaker 2: 29:29

The biggest variances were were 6% on the downside. So it wasn't the worst fund, but where it was when it wasn't it's worst performance Performing year. The difference between that fund and the best fund was 6%. Okay, so that sucks. The best it was, that was 3.4 percent. So that's pretty significant.

Speaker 2: 29:53

I actually had the best upside out of all these funds that we talked about, when you only compare it to an index. So. So when I own, when I take out the other, when I take out American funds, that American fund growth fund, when I take that out, so I only go back to the index funds it was the best eight times, it was the second best twice, it was the second worst three times and it was worse one time, right? So that tells you that that American funds was actually when it was bad. It was, you know, worse than this fund. That one time probably. But on a one-on-one, three indexes, three of the same indexes but with wildly different performances, it's still be those three different index strategies, right?

Speaker 2: 30:38

Because it's not, it's not a fair fight. It's three once a puncher, once a kicker and once a headbutter. Right, here comes this M&A fighters like I'll take all three of you on at one time. And it beat it, literally beat eight out of 14. You know it beat. It beat all three of them. I mean that's so it'd be at least two of them. Ten out of 14 times like. Like. This amplifies the point that the fight is being that, at the way we're scoring the fight, when we're making the argument that nobody out there can beat the markets and nobody can do it consistently, we're actually. It's not a fair fight.

Speaker 1: 31:19

Yeah right.

Speaker 2: 31:20

We're not. We're not controlling the two. We're not treating both Categories of fighters fairly. One is allowed to literally do everything that, anything that they want to do, and they're not being rated, and the other one is being scored against things that they categorically don't even match up against and at the same time, they are a small representation over the giant Line-up of investment managers out there who have no representation, that are fundamentally doing something different. It's we're gaming the system here to get our way, basically.

Speaker 1: 31:55

Well, and if you're not, if you're not careful and you ever go out to meet with a financial professional, they can. They can skew numbers in such a way, using indexes to prove what they're trying to offer you, right? So what I think, what this even just shows us, is you got to learn how to ask great questions so that we understand. What are we actually benchmarking something against or what are we comparing it to? Because you wouldn't do this in your real life, in any other scenario. You wouldn't compare the way you are as a parent or as a spouse to somebody else that, if you saw, they'd be like Don't compare me to that.

Speaker 1: 32:29

But yet when it comes to investments and we throw the words like rustles and large gap, that's beyond most people's. You know level of understanding as to what that means, so they go. Okay, I mean it just underperformed, outperform, so I'll just take it for what it is. So I know this was a little bit of a numbery episode, but I think it was trying to drive home the fact that you have to understand these stats and numbers to verify, Kind of what we've been leading up to this point.

Speaker 2: 32:56

Yeah, and we got a little bit more. I know this is a little bit of a longer episode, but I think it matters and this gives people the idea. I mean, like we still have a couple more episodes on on this topic. There's a lot here in reality. An index fund is just another style of fun. Yep, it's a. It's a. It's another option in the list of options. It's not a magical thing and there's variants and some of them are good, some of them are bad and there's periods where one strategy seems to work over another. But if you mess around with the years a little bit there, if you cherry pick, you can repaint the entire picture. Yep, and what's happened is is we have people, like we talked about before that run with some of this information, who don't understand it themselves and it becomes kind of Lord or law, even though they're. They're really. There ought to be a much more Established discussion about it and challenge to it.

Speaker 2: 33:55

The index is really more of a theoretical idea, and Comparing a small portion to something without any constituency consideration for situational issues To, I mean this is just hypothetical. It's garbage on top of garbage. So the question is, steve, why is there so much information out there about index of that investing over active investing, and the reason is because of money. Index investing passive investing means that you are helpless and that you will never be able to do anything better or anything else. Give up, give me your money, close your eyes for the next 50 years. You can't do anything better. It also means that advisors don't need to be in the mix. They can't bring you any value, they're just really super expensive and they're just trying to take your money. And I do agree that there's a lot of advisors out there trying to do it, but there are also advisors out there who are very good at what they do, just like anything else. Find the ones that are good. So the financial institutions that are pushing this, they're doing it for a couple of reasons. One of them is they want to have better control over the investors. They really want to shape the perceptions and the ideas about what finance and the markets are, because if they can completely brainwash you, you're never gonna leave them. You're there, you're just gonna sit there and pay them over and over and over again. You're paying the fees. You might say, yeah, but the fees are at least lower. They're making tons of money and you on the cash floating and all that other stuff that's going on inside those funds. There are other ways that they're making money on you. Again, you don't. You have to know what to look for here. In order to frame out the rest of the conversation, there's no benevolent investment gods out there that are doing it for free.

Speaker 2: 35:33

You know how do you think Vanguard got so big? It's not because it's literally not because they're doing actually what they're preaching. It's because they're actually making money off of you. You know it's. They get paid, not on performance. They get paid by your balance. You put money in, they get paid. You do 10%, they get paid. You do 15%, they get paid. You do minus 8%, they get paid. So if, no matter what you do, you don't think you can do better, they get paid. What do you? Why do you think? The story is you can't do any better, they get paid. They don't care about optimal performance. They don't care about you individually. The money's in the fund. It's a huge business Vanguard states.

Speaker 2: 36:16

During BlackRock, all firms have been behind driving indexing.

Speaker 2: 36:19

Why? Because you get in there, they get paid and you feel like you can never do anything better. So you're completely a hundred percent. You don't even let the other ideas come in. This is why I say let me finish challenging all the way through the series before you respond. You got to let the information in Before you cross your arms and say, nope, you know, that's not it, because this is a financial game with your money.

Speaker 2: 36:45

In fact, you know Vanguard brags. You go to the website Investor dot, vanguard dot com. Slash investment, dash products, slash actively managed funds. You go to that website. They actually brag about how, over the past ten years, 95, 94% of their actively managed funds Perform better than their peer group averages. You know one thing that they didn't do there compare them to the indexes. So, number one, there's a little word salad going on. But number two, they're bragging about the performance of their actively Managed funds. You know what else is in the peer group, the indexes. The indexes are actually in the peer group. So they're bragging about how active management actually beats index Indexing, your passive investing on their website, while they're telling you you can't do anything about it.

Speaker 2: 37:35

Yeah but you don't look for that because you're so brainwashed into this idea that you know it's low cost and you know Most people. If I asked them, are you in an active or passive fund? They cannot tell me. I.

Speaker 1: 37:47

Think that's why it's gonna bring home the point in our next few episodes where we're going to reveal then how do the wealthy just keep getting wealthier? If it's, if it's not this, then what's the solution? So, stay tuned. Gonna leave you with a little bit of a hook. As always, get in touch with Travis and I. If you want to Challenge or ask questions, reach out to us. Visit ditch the suits calm. That's ditch the suits calm, but, as always, we appreciate you stopping by. Ditch the suits podcast.