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Sunday, December 10, 2006

Why invest in a large well diversified fund?

Someone asked me why I recommend investing in a large well diversified fund. It can only provide an average return earned by the market. He feels that it is better to select a good fund manager that can perform better than the market.

I replied: "It is difficult to select a good fund manager. There are a few thousand managers to choose from. If you choose a manager with a good track record in the past, you are not sure that they can perform better than average in the future. You pay a higher fee, and may not get a better return (after deducting the fee).

By investing in a large, well diversified fund, you enjoy the following:

- low fees, due to economic of scale
- diversification (so that you are not affected by a few poor performing stocks)

If you can get an average market return on global equity, you are likely to do well over the long term. By investing for many years, you enjoy some good years and some bad years. The average has always earned more than bonds or cash over a 10 year period."

Lesson: Invest for the long term in a large, well diversified fund.

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