Why you're better off with a tracker fund

If you want to succeed at investing, avoid fund managers. That's the advice of Burton Malkiel, who has spent 50 years studying the stockmarkets. "My thesis is: if you invest in a low-cost, passively managed portfolio, you will generally do a lot better than the typical high-cost, actively managed fund," Malkiel, a professor of economics at Princeton University, tells The Guardian. He has a point. Historically, tracker funds which follow an index or a market have outperformed managed funds. In the year to 19 February, the average equity-based unit trust in the UK returned 33.9%. The FTSE All-Share tracker gained 38.3%, says Patrick Collinson in The Guardian.

The difference isn't necessarily because fund managers are bad stock-pickers some of them are very good. It's a combination of factors. The biggest one is the fees for actively managed funds. Even if a fund manager delivers good returns, investors don't get the full benefit as management fees take away a large chunk. Malkiel points out that between 1988 and 2007, the average equity fund in the US earned 11.6% a year. That would be fine except that the average investor got just 4.5% a year thanks to fees.

Fees and human behaviour the other downside to managed funds. Investors both the professionals and you and I tend to pour money in at the top of the market and sell at the bottom. We'd be much better off just picking a few index funds and sticking with them. That way we limit our costs both in terms of annual management fees and the cost of buying and selling.

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Follow Malkiel's advice and investing seems simpler too. Just decide what sectors you want to invest in, then drip-feed your money into suitable index funds (or exchange-traded funds ETFs). Once a year you should rebalance your portfolio, but that's it. This method means you won't ever beat the market as you would if you were lucky enough to back a star fund manager. But nearly everything you make ends up in your own pocket.

The average total expense ratio (TER) for a tracker fund in the UK is 0.89%, and less for an ETF. But for a managed fund it almost doubles to around 1.6%. And what do you get for the extra? A good chance your manager will fail to beat the market. Managed funds in the UK All Companies sector have returned an average of 5.2% a year over the past five years, while the FTSE All-Share index has returned 6.5%. So just stick with the computer-run, cheap tracker funds.

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.