"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over." ~ Aesop
Living on the coast of South Carolina, I can attest that a flexible nature is required to survive the most powerful tropical storms:
The hardest of woods break and the softest of reeds bend.
This go-with-the-flow nature extends to escaping deadly rip currents in the tide and it also applies to navigating the volatility of financial markets.
On my mutual funds site today, I wrote how Index Funds Had a Record Year in 2011. This milestone was marked by the record amount of investor money flowing (fund flows) into index funds. In contrast, one of the largest mutual fund families, American Funds, had record outflows. Why is this significant and what does it have to do with reeds in the wind?
"Thus what we gain is Something, yet it is by virtue of Nothing that this can be put to use." ~ Lau Tzu
Index funds are passively managed, which means there is no fund manager or team of managers trying to "beat the market" by using their knowledge and skill to research and analyze stocks with the greatest prospects of high relative returns. Instead, the objective is to simply match the returns of the benchmark index, such as the S&P 500 -- an example of knowledge yielding to humility. This passive nature keeps expenses low and eliminates the risk of human error caused by emotion (i.e. greed, complacency, and hubris) and it reduces the risk of inferior returns due to a random set of unforeseen circumstances (bad luck).
Actively-managed fund managers attempt to beat the market, which is the primary reason why most actively-managed funds lose to passively-managed funds over long periods of time. In summary, the higher expenses and greater exposure to human fallability is why S&P 500 Index Funds Beat the Pros in 2011...
Passive funds bend; active funds break.
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