Warren Buffett has often said that passively managed funds are better than actively managed funds as they tend to have better returns. In an article that Tim Armour wrote for CNBC, he makes the case that this isn’t necessarily true. While Armour agrees that there are too many actively managed funds that are a disservice to their investors, he says that’s not always the case.
Tim Armour writes that active versus passive isn’t really the argument. Many mutual funds have poor returns due to excessive fees and trading. The key is to find actively managed funds that are low cost and keep trades to a minimum. Armour also says that the key to finding a good actively managed fund is finding those where the fund manager has a large part of his or her own money in it. He goes on to write that an overlooked problem with index funds is that they are completely exposed to market volatility and losses when the market inevitably have a downturn. He said that one of the best ways to grow your nest egg is to do better than others when the markets go down.
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Tim Armour is the CEO and Chairman of the investment firm Capital Group, as well as a financial advisor. He has spent his entire 34-year career in the financial industry at Capital Group, having first joined the company in its The Associates Program after he graduated from college. Armour earned his degree in economics at Middlebury College.
Tim Armour has written other articles where he makes the case that you don’t need to settle for average returns. His advice is to have an active manager who “earns their keep”. If your money is in an active fund that is trailing the index, Armour’s advice is to find another fund manager.