Given the opportunity to invest in one of two S&P 500 stocks, which of the following would you choose? Company A has no debt, and is consistently delivering solid earnings gains. Company B is heavily laden with debt and has experienced rapidly contracting earnings. Of course, most prudent investors would invest in Company A (and possibly sell short Company B). But if you invest in an S&P 500 index fund, you will end up owning both, and stock in 498 other companies, including the good, the bad, and the ugly. Why not try to identify just the good opportunities?
Successful marketing by low-cost providers has driven investors, frustrated by low-performing, high cost investments, into Index Funds and broad-based ETF’s. Index Funds deliver returns that merely track the markets, and prevent investors from gaining valuable advantages to improve portfolio performance. Over the past 35 years, the S&P 500 has included companies such as Palm, Circuit City, Sears, and Eastman Kodak. If you invested in an S&P 500 fund, you owned stock in these companies as they were rapidly losing relevance and watching profits fall. In the meantime, innovators such as Whole Foods and Apple entered the S&P 500, and luckily investors who held S&P 500 Index funds owned these as well. Active managers like Pawleys seek to identify good investment opportunities and discern those from the bad and ugly. Please check out our performance record to see how well we are accomplishing that objective.
Index funds, ETF’s and Target Date Retirement Funds are great products for investors who are just getting started. But managers who go long the good stocks and sell short the bad and ugly can provide a valuable advantage to investors over the long term.
Source: The Capital Group.
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