{"id":7161,"date":"2013-11-15T11:02:42","date_gmt":"2013-11-15T19:02:42","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7161"},"modified":"2016-12-21T07:28:18","modified_gmt":"2016-12-21T15:28:18","slug":"index-funds-can-beat-the-market-heres-how","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/index-funds-can-beat-the-market-heres-how\/","title":{"rendered":"Index Funds Can Beat The Market, Here’s How…"},"content":{"rendered":"

It sounds a little crazy at first blush, but\u00a0index funds<\/a>\u00a0can beat the market if you use them the right way.<\/p>\n

Not just any single index fund, naturally. As you might expect from the name, index funds are designed to faithfully track the market itself.<\/p>\n

They do so at rock-bottom cost. If you buy an S&P 500 fund that is built to index the market, you can expect to get that return, minus an extremely low fee. The\u00a0Charles Schwab\u00a0U.S. Large-Cap ETF (SCHX), offers an\u00a0expense ratio<\/a>\u00a0of just 0.04%.<\/p>\n

\"index<\/a><\/p>\n

Let’s compare that to a typical large-cap mutual fund. Picking one out of the hat, consider the T. Rowe Price Equity Index 500 Fund (PREIX). It has an expense ratio of 0.28%. A decently run product at a reasonable price, for sure.<\/p>\n

Over the past three years, the Schwab fund has returned an annualized 16.51% (October number) and the T. Rowe mutual fund 15.96% (end of September). Run that through the\u00a0FINRA fund analyzer<\/a>\u00a0and you find that the difference in total fees is considerable. On a $100,000 investment earning a market return, the fees for the Schwab fund come to $1,688 and for the T. Rowe product it’s $11,479.<\/p>\n

The gap in return is even higher. Because of lost compounding, you leave $17,990 on the table with the pricier fund.<\/p>\n

Okay, you might say, I’ll buy the inexpensive ETF. But even with the cheaper fund I’m still out a decent-sized mortgage payment in terms of the fees. I can’t beat the market that way, right?<\/p>\n

Ah, but yes you can, if you mix up a selection of index\u00a0ETFs\u00a0in a\u00a0well-diversified portfolio<\/a>. Burton Malkiel, the Princeton professor and author of “A Random Walk Down\u00a0Wall Street” figures the simple act of rebalancing gave ETF portfolio investors a\u00a01.5% bump over the stock market<\/a>\u00a0over the past 15 years.<\/p>\n

Yes, index funds can beat the market<\/h2>\n

Morningstar shows the S&P 500 returning 7.67% annualized over the past 10 years. Your $100,000 investment over 20 years at that rate of return becomes $456,984.<\/p>\n

Add on Malkiel’s extra 1.5% and the numbers change. Earning 9.17%, your initial investment turns into $613,060. Let it run 10 more years and that single investment is now worth well north of $1.5 million.<\/p>\n

Past performance is meaningless, of course, but a balanced collection of diversified, low-cost\u00a0ETFs\u00a0is by no means a wild ride. Instead,\u00a0steady compounding<\/a>\u00a0and\u00a0periodic rebalancing<\/a>\u00a0help smooth out the rough patches in the markets while building real wealth.<\/p>\n

Rocket science? Hardly. But it is discipline, saving and\u00a0prudent investing<\/a>\u00a0\u2014\u00a0and making sure you get the most bang for your investing buck, year after year.<\/p>\n","protected":false},"excerpt":{"rendered":"

It sounds a little crazy at first blush, but\u00a0index funds\u00a0can beat the market if you use them the right way. Not just any single index fund, naturally. As you might … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7162,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3,11],"tags":[62,42,43,37],"yoast_head":"\nIndex Funds Can Beat The Market, Here's How... | MarketRiders<\/title>\n<meta name=\"description\" content=\"It sounds a little crazy at first blush, but index funds can beat the market if you use them the right way: index ETFs in a well-diversified portfolio.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.marketriders.com\/investing\/index-funds-can-beat-the-market-heres-how\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Index Funds Can Beat The Market, Here's How... | MarketRiders\" \/>\n<meta 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