Investing in Index Funds: What is it?

It is an increasingly popular investment method in the world, which stands out compared to traditional funds by:

  • Simplicity;
  • Transparency;
  • Low fees;
  • Better long-term results.

Traditional Funds vs. Index Funds: The Key Facts

Traditional funds try to guess which stocks or bonds will be the most profitable in the future and when is the best time to buy and sell them

These are called active management funds and most Lithuanian pension funds are managed using active investment management. In this way, fund managers aim to beat the market, i.e. earn more than the entire market in which they invest. Unfortunately, historical results show that almost all actively managed funds underperform the market in which they invest over the long term.

Active management - higher management fees, which have a significant negative impact on long-term investing

Active investment management incurs significant fees that reduce the value of investments. Even a small difference in the management fee has a significant impact on the accumulated investment amount over a long period of time. For example, a 1.5% fund's annual total costs over a long period of time can lead to a thirdly lower accumulated amount compared to the amount accumulated without fees. At least one percent lower management fee would allow to accumulate 25% more wealth (source: OECD). We aim to keep investment management costs as low as possible.

Statistics show that the market outperforms actively managed funds over the long term

Research shows that even in one of the most advanced markets, the US, the market eventually outperforms actively managed funds over the long term. Over the past 10 years, less than one in five actively managed funds have outperformed the market, and over 20 years, only one in nearly twenty (source: Forbes).

Index funds outperform traditional funds year after year

From the beginning of the first index funds until today, the trend is the same all over the world - index passive investment funds outperform actively managed funds in terms of long-term results.

Index funds are an opportunity to invest in the entire market without choosing stocks or bonds

These are called passive investment funds. It's about spreading investment around the world and linking the results to the growth of the market as a whole. No need to guess where to invest, when to buy, when to sell. There is no risk of incorrect investment decisions. No high active management fees.

Index funds - simple, clear and transparent

As index funds replicate market indices, their composition is clear and transparent. At that time, information on the composition of actively managed funds is often difficult to find, it is constantly changing.

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