Billions of dollars are paid to financial advisors each year to earn a return th
ID: 2382855 • Letter: B
Question
Billions of dollars are paid to financial advisors each year to earn a return that is superior to what an individual could earn on his or her own. John Bogle started the Vanguard company and the first index mutual fund. Please discuss what index funds are, how they are different from other mutual funds, and whether (or not) you believe in using this vehicle in place of a financial advisor (not totally replacing an advisor - just with regard to stock/mutual fund selections). Billions of dollars are paid to financial advisors each year to earn a return that is superior to what an individual could earn on his or her own. John Bogle started the Vanguard company and the first index mutual fund. Please discuss what index funds are, how they are different from other mutual funds, and whether (or not) you believe in using this vehicle in place of a financial advisor (not totally replacing an advisor - just with regard to stock/mutual fund selections). Billions of dollars are paid to financial advisors each year to earn a return that is superior to what an individual could earn on his or her own. John Bogle started the Vanguard company and the first index mutual fund. Please discuss what index funds are, how they are different from other mutual funds, and whether (or not) you believe in using this vehicle in place of a financial advisor (not totally replacing an advisor - just with regard to stock/mutual fund selections).Explanation / Answer
A mutual fund is a portfolio of financial assets like stocks and bonds. The portfolio is managed, on behalf of the clinets, by an asset (portfolio) manager who helps the clients diversify their savings according to their needs and preferences, and risk factors.
The mutual fund requires the investors to pay a small fee as percentage of total assets in the MF portfolio. The asset manager chooses the higher-performing assets for the portfolio.
An Index Fund (IF) is a sub-type of mutual fund in that it is a portfolio of financial assets, but it does not comprise only the higher-performing assets. Instead, the portfolio comprises all the stocks of a particular index (like Standard & Poor's 500 Index), and the portfolio objective is to duplicate the performance of the Index.
While an IF is ideally suited for investors who are risk-averse and want to minimize their investment risks by investing in an IF which replicates the respective market performance (e.g. an IF of S&P 500 Index will replicate the performance of the S&P Index itself), and therefore provides only the market average return, tisk-taking investors will prefer to bear more risk in exchange of more return, by investing in riskier portfolios consisting of other stocks or financial assets. Therefore, where to use a MF or an IF is a pure personal choice based on investor's risk-averse quotient and ability to take & bear risks.
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