{"id":160,"date":"2022-01-13T15:37:01","date_gmt":"2022-01-13T15:37:01","guid":{"rendered":"https:\/\/wealthiereveryday.com\/?p=160"},"modified":"2022-03-21T11:24:39","modified_gmt":"2022-03-21T11:24:39","slug":"passive-funds-vs-active-funds","status":"publish","type":"post","link":"https:\/\/wealthiereveryday.com\/passive-funds-vs-active-funds\/","title":{"rendered":"Why Passive Funds are Usually Better than Active Funds"},"content":{"rendered":"\n<p class=\"has-medium-font-size\">In this post, I will be discussing the difference between passive index funds and actively managed funds and how they are slowly but surely milking the money from your pocket.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-actively-managed-funds-work\">How actively managed funds work?<\/h2>\n\n\n\n<p class=\"has-medium-font-size\">Actively managed funds work pretty much like this: Someone is actively following the markets and trying to time the buys and sells of the fund at the right time to beat the index. By doing so, there is always room for human error. They might have a strict set of rules on when to buy and when to sell, but still, they rarely can beat the index in the long run.<\/p>\n\n\n\n<p class=\"has-medium-font-size\">Most of the actively managed funds can\u2019t beat the index they are trying to win. On top of that, actively managed funds charge much higher fees than index funds. For example, even if the actively managed fun manages to beat the index by 1 percent for one year, if the fees of the fund are 2 percent, guess who is going to lose. You guessed it, you. If you put your money into a fund like that.<\/p>\n\n\n\n<p class=\"has-medium-font-size\">There is even more. If the market faces a bad year, ending up lower than last year, on top of the initial loss, you will still be paying the 2% fee. Some funds even have deposit and withdrawal fees. These can be for example, 1%, meaning if you wish to deposit 100 dollars and withdraw it the next day, you would be getting back around 98 dollars just by doing so.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-much-the-fees-affect-your-returns\">How much will the fees affect your returns?<\/h2>\n\n\n\n<p class=\"has-medium-font-size\">The 2% fee might not seem like much at the time of buying it. However, there is a major difference between 2% fee and no fee in the long run. Even if the fund manages to get similar returns to the index, which most of the time isn\u2019t the case, in the long term, your earnings will take the hit. See the example below between a 2% fee and no fee with an 8% annual return on investment.<\/p>\n\n\n\n<p class=\"has-medium-font-size\">Here is a little example on how much the 2% difference will affect your returns in the long run.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>8% annual return<\/td><td>2% fee with<\/td><td>no fee<\/td><\/tr><tr><td>Initial investment<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10 000<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10 000<\/td><\/tr><tr><td>year 1<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10 600<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10 800<\/td><\/tr><tr><td>year 2<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 11 236<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 11 664<\/td><\/tr><tr><td>year 3<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 11 910<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 12 597<\/td><\/tr><tr><td>year 4<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 12 625<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 13 605<\/td><\/tr><tr><td>year 5<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 13 382<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 14 693<\/td><\/tr><tr><td>year 6<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 14 185<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 15 869<\/td><\/tr><tr><td>year 7<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 15 036<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 17 138<\/td><\/tr><tr><td>year 8<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 15 938<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 18 509<\/td><\/tr><tr><td>year 9<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 16 895<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 19 990<\/td><\/tr><tr><td>year 10<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 17 908<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 21 589<\/td><\/tr><tr><td>year 11<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 18 983<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 23 316<\/td><\/tr><tr><td>year 12<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 20 122<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 25 182<\/td><\/tr><tr><td>year 13<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 21 329<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 27 196<\/td><\/tr><tr><td>year 14<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 22 609<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 29 372<\/td><\/tr><tr><td>year 15<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 23 966<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 31 722<\/td><\/tr><tr><td>year 16<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 25 404<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 34 259<\/td><\/tr><tr><td>year 17<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 26 928<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 37 000<\/td><\/tr><tr><td>year 18<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 28 543<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 39 960<\/td><\/tr><tr><td>year 19<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 30 256<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 43 157<\/td><\/tr><tr><td>year 20<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 32 071<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 46 610<\/td><\/tr><tr><td>year 21<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 33 996<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 50 338<\/td><\/tr><tr><td>year 22<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 36 035<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 54 365<\/td><\/tr><tr><td>year 23<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 38 197<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 58 715<\/td><\/tr><tr><td>year 24<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 40 489<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 63 412<\/td><\/tr><tr><td>year 25<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 42 919<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 68 485<\/td><\/tr><\/tbody><\/table><figcaption>Difference between 2% fee and no fee during 25-year period.<\/figcaption><\/figure>\n\n\n\n<p class=\"has-medium-font-size\">As you can see, there is a big difference between these two. With a 2% fee your initial investment of 10 000 dollars would have turned to roughly 43 thousand. With no fee the amount would be over 68 thousand. You don&#8217;t have to be a mathematician to spot the difference.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"difference-gets-bigger-the-longer-you-invest\">The difference gets bigger the longer you invest<\/h2>\n\n\n\n<p class=\"has-medium-font-size\">The difference will be even bigger after the 25 year mark. Check out the chart below.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>year 26<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 45 494<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 73 964<\/td><\/tr><tr><td>year 27<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 48 223<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 79 881<\/td><\/tr><tr><td>year 28<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 51 117<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 86 271<\/td><\/tr><tr><td>year 29<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 54 184<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 93 173<\/td><\/tr><tr><td>year 30<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 57 435<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 100 627<\/td><\/tr><tr><td>year 31<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 60 881<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 108 677<\/td><\/tr><tr><td>year 32<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 64 534<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 117 371<\/td><\/tr><tr><td>year 33<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 68 406<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 126 760<\/td><\/tr><tr><td>year 34<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 72 510<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 136 901<\/td><\/tr><tr><td>year 35<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 76 861<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 147 853<\/td><\/tr><tr><td>year 36<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 81 473<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 159 682<\/td><\/tr><tr><td>year 37<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 86 361<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 172 456<\/td><\/tr><tr><td>year 38<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 91 543<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 186 253<\/td><\/tr><tr><td>year 39<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 97 035<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 201 153<\/td><\/tr><tr><td>year 40<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 102 857<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 217 245<\/td><\/tr><tr><td>year 41<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 109 029<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 234 625<\/td><\/tr><tr><td>year 42<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 115 570<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 253 395<\/td><\/tr><tr><td>year 43<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 122 505<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 273 666<\/td><\/tr><tr><td>year 44<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 129 855<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 295 560<\/td><\/tr><tr><td>year 45<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 137 646<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 319 204<\/td><\/tr><tr><td>year 46<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 145 905<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 344 741<\/td><\/tr><tr><td>year 47<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 154 659<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 372 320<\/td><\/tr><tr><td>year 48<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 163 939<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 402 106<\/td><\/tr><tr><td>year 49<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 173 775<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 434 274<\/td><\/tr><tr><td>year 50<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 184 202<\/td><td>&nbsp;&nbsp;&nbsp;&nbsp; 469 016<\/td><\/tr><\/tbody><\/table><figcaption> Difference between 2% fee and no fee after 25 years until 50 year mark period. <\/figcaption><\/figure>\n\n\n\n<p class=\"has-medium-font-size\">I think the chart speaks for itself. The difference between a 2% fee and no fee is huge. Even if it sounded small at the beginning, if the time span is 50 years, the small difference will grow into a huge difference. Don&#8217;t know about you, but I would have some use to that extra 284\u00a0814 the fund with no fee would have gotten me.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"752\" height=\"452\" src=\"https:\/\/wealthiereveryday.com\/wp-content\/uploads\/2022\/01\/image-1.png\" alt=\"\" class=\"wp-image-164\" srcset=\"https:\/\/wealthiereveryday.com\/wp-content\/uploads\/2022\/01\/image-1.png 752w, https:\/\/wealthiereveryday.com\/wp-content\/uploads\/2022\/01\/image-1-300x180.png 300w\" sizes=\"(max-width: 752px) 100vw, 752px\" \/><figcaption>Graph about the difference, orange representing no fee, blue representing 2% fee during 50 year time period with 8% annual return<\/figcaption><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"final-words\">Final words<\/h2>\n\n\n\n<p class=\"has-medium-font-size\">The lesson of the story is next: Most of the times, maybe not always, but most of the times, passive index funds with low fees are the better option compared to active funds. Usually they are a better option than investing straight into stocks and trying to beat the market yourself as well. Unless you happen to be the next great investor of our time. <\/p>\n\n\n\n<p class=\"has-medium-font-size\">I have talked about this before. I personally use the strategy, where 80% of my money, what I put into the stock market, is in low cost index funds, the rest 20% I put into stocks of my choice. This will keep things interesting for me, when I can see how my own picks are performing.<\/p>\n\n\n\n<p class=\"has-medium-font-size\">It doesn&#8217;t really matter how the markets are performing. The difference will stay almost the same. I&#8217;m not saying all active funds are bad. Just that most of the time, especially in the long run, they cant beat the index. Because of this, unless you want to gamble and try to get the 1 out of 10 funds that will beat the index, it might be better to just stick with the low fee index funds.<\/p>\n\n\n\n<p><em><strong>This is not investment or financial advice. I&#8217;m sharing my own thoughts and I<\/strong><\/em> <strong><em>hope they can be helpful to you. Past returns of the market are not a guarantee of future returns. Always do your research before risking your hard-earned money.<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this post, I will be discussing the difference between passive index funds and actively managed funds and how they are slowly but surely milking the money from your pocket. How actively managed funds work? Actively managed funds work pretty much like this: Someone is actively following the markets and trying to time the buys &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/wealthiereveryday.com\/passive-funds-vs-active-funds\/\"> <span class=\"screen-reader-text\">Why Passive Funds are Usually Better than Active Funds<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":1,"featured_media":165,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-global-header-display":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","footnotes":""},"categories":[3],"tags":[55,14,11],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ 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