The Little Book of Common Sense Investing summary

Despite what you’ve just discovered about the costliness of funds, you might still be thinking of investing in an actively managed fund. Before you do, though, consider if those funds perform well compared to the overall stock market.

Unfortunately, they probably don’t. Most funds go bankrupt or fail to generate significant returns.

We’ve painted the picture of how poorly most funds perform, so you might wonder why people keep investing in them.

First of all, investors often underestimate the true cost of actively managed funds.

Don’t let what you now know about actively managed funds persuade you to keep all your money under your bed. The index fund is your best alternative.

In contrast to actively managed funds, index funds are much more cost-efficient.

Each index fund comprises an expense ratio that represents management fees and operating expenses. These expenses, though typically totalling less than one percent, can add up in a long-term investment.

For instance, the Fidelity Spartan Index fund has an annual expense ratio of 0.007 percent, while the J.P. Morgan Index fund’s is 0.53 percent. Both funds have expenses below 1 percent, but over longer investment periods like a decade, those tenths of a penny add up.

Whenever you’re considering where to invest your hard-earned money, be skeptical when it comes to the latest investment fads.

The fierce competition between index funds causes a continuous cycle of new trends. Index funds were invented in 1975, and today there are already 578 index funds competing with each other! Long-standing funds compete by trying to lower their costs as much as possible and thus lure in discerning investors. Meanwhile, new funds entering the market attempt to gain clients by promising larger rewards through new stock-picking procedures. Consequently, they also charge more.