Index funds offer lower costs
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.
Q: What did you mean by saying that investors in the Growth Fund of America would do better in an index fund?
A: Growth Fund of America has become so incredibly large that it is, by statistical and historical performance measurement, a mirror of the overall stock market. Yet its internal management costs and commissions paid by investors are significantly higher than index funds that are the most commonly used investment designed to mirror overall market performance. There are few instances in investing that we can be virtually assured of a specific outcome. This situation is one of those rare exceptions where we can be assured that an investor in a typical exchange-traded index fund will outperform an investor in the Growth Fund of America because it is statistically impossible that the deviation in performance between Growth Fund of America and an index fund would exceed the deviation in costs between these choices. The savings in management fees and commissions offered by index funds will likely be the only difference in performance between these two investment choices.
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