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The $13 trillion lie

What you've been told about mutual funds is not true

Legal Disclosure: Tony Robbins is the Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.

For years we’ve been told that mutual funds are the safe place to invest our money and expect a 12% return. But the 12% return was a myth – one that Americans currently invest $13 trillion in. The ugly truth is that you have less than a 4% chance of picking a mutual fund that matches or beats the S&P 500 index.

By way of comparison, consider the game of blackjack. If you’ve ever played, you know the goal is to get as close to 21 without going over, or “busting.” If you get two face cards in blackjack (each face card equaling 10), and your inner idiot shouts, ‘Hit me!’ you have about an 8% chance of winning – double your chance of picking a mutual fund that performs better than the index.

In March of this year, Warren Buffett advised LeBron James to invest in a low-cost index fund; it is advice that Buffett follows himself. In fact, Buffett intends to provide for his wife after his passing through low-cost index funds.

David Swensen, manager of Yale’s nearly $24 billion endowment also endorsed index funds, stating, “When you look at the results on an after-tax basis, over reasonable long periods of time, there’s almost no chance that you end up beating the index fund.”

While it may seem convenient to be able to bet on an active manager, trusting in their past performance and our own intuition, the research shows that the index funds will beat it 96 times out of 100.

Header image ©DeReGe/shutterstock

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