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Friday, April 12, 2013

A Nobel Laureate Cuts Active Mutual Funds

News summary by MFWire's editors

And there's another nail in the coffin as the the debate against active funds continues, this time with the help of a Nobel Laureate.

Forbes magazine reports that economist William Sharpe has written an analytical paper that has determined that investing in high-fee active funds can lower the standard of living of a retiree by as a much as a third compared to investing in low cost index funds.

The paper, titled The Arithmetic of Investment Expenses, looks at the expenses of active funds and index funds and calculates portfolio terminal values and probabilities using various scenarios going out several decades, according to the Forbes article.

The conclusion: "the odds are even that an investor in the low-cost fund will be well over a third richer than an investor in the high cost fund after 30 years. But there is a small chance that an investor in the low-cost fund will regret not having selected the high-cost fund. For those who choose funds with high expense ratios, hope may spring eternal," the article quotes Sharpe's writing.

Read more in Forbes

Edited by: Tommy Fernandez

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