Tag: investing

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Passive investment funds aren’t guaranteed to beat their active counterparts

In this week’s WSJ article, an excellent discussion on was given on active versus passive fund performance around the world. Fund performance over 5 and 10 year periods show that, while passive investments are superior in most of the world, there are some pockets where active management did better.

Excess performance is country specific.

As I’ve highlighted in this table, U.S. stock funds investing in small, medium and large companies consistently underperformed their passive counterparts. These results help explain why index funds, and ETFs in particular, have become so popular in recent years.

The article also highlights another sad reality of active fund investing.

“…most active managers exhibit little ability to consistently beat their peers over time. “

Derek Horstmeyer, Wall Street Journal, March 3, 2019

So, what can we learn from this article?

Passive investments using ETFs don’t guarantee excess performance over their active counterparts. But, more times than not, passive investing will outperform active investing. This fact may not always be true outside the U.S., but for investors that primarily consume with U.S. dollars, passive investments in ETFs appear to be a clear winner.

Thanks for reading!

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Your Retirement Nest Egg

In a recent issue of the Wall Street Journal, there was an excellent retirement article. In it, the author responded to a reader’s question “How much does my nest egg need to be?”. Your retirement nest egg is very important! So, we prepared a summary and some additional insights to consider. Our perspective is drawn, in part, from our award-winning research on retirement income planning.

retirement nest egg

Article summary by ETFMathGuy

The article starts with predicting your expenses. This is arguably a difficult task, and where many people stop. But, without this information, there is really no way to estimate the “right size” of a retirement nest egg.

In summary, the article suggests the following calculation.

  1. Start with an estimate of your expenses. A common approach to this is to assume a percent between 60-80% of expenses pre-retirement. This approach assumes that your expenses go down in retirement. That may be true for many retirees, as they no longer have mortgage payments or dependent expenses. Of course, a more precise estimate can be done.
  2. Subtract from this any guaranteed income, such as social security and after-tax pension benefits or annuities.
  3. Take this difference and multiply it by 25. In this article, they assume that a 65-year old lives until 90. This age is a conservative estimate, based on information from the Social Security Administration.

What isn’t stated in the article about your retirement nest egg

While I enjoyed this article, it made some assumptions about your retirement nest egg. For instance, the suggested value doesn’t include uncertain investment returns or inflation. The net effect of including both of these would typically give a retiree more years of retirement income. The extra income would come from a conservative investment in retirement, less inflation. Using a 4% conservative after-tax average return and 3% average inflation, this net effect would provide a 1% gain (on average) each year.

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