Beginner Investor - Looking for some answers, page-5

Well, you've asked a fairly large question, but here goes.
Given that you are, by your own admission a novice, you have arguably made the right decision to invest in a managed fund rather than picking stocks yourself. So I think that's a good call. So then you are asking how does an index fund outperform a managed fund?

To begin with, you need to understand that index funds ARE managed funds. A managed fund is just a legal structure, it has nothing to do with the investment itself. At it's simplest, managed funds can be either active or passively managed. An active manager is basically trying to deliver a superior outcome to an index fund. Active managers will charge a higher fee for the privilege. An index fund will just try to mimic the market index as closely as possible at a much lower cost.

So, when you see references to index funds frequently outperforming active funds, this is because outperforming the market on anything like a regular basis is tough to do. No active manager will do it all the time. It's even tougher to pick which active managers can do it more regularly than the rest of their competition. So, the fact that Index funds often outperform active funds is more to do with active managers failings, not index funds being 'better'. Fees do come into it, but it's not the whole picture. After all, a traditional Index fund will only ever deliver the market return less a small fee. It won't 'beat' the market.

So, here is an example. If you had invested $10,000 in an Index Fund (ASX:STW), the Perpetual Australian Share Fund (an active fund) and the broad ASX200 Index.

So you can see here that the Active fund has beaten the index as well as the passive fund. But, not all funds will do this consistently, if at all. Perpetual are a high quality shop, but even they will not win all the time. And some other managers can do even better over certain time periods.

I suspect the charts you are using do not account for dividends being reinvested along the way (this chart does). I think this is why you are struggling to see where the value is.

If you are going to keep tipping money in each month, this allows you to take advantage of dollar cost averaging. Sometimes the market will be higher, sometimes lower. But it allows you to average out. The chart above assumes you just put in $10,000 in a single hit on day 1. This also means that returns compound over time.

So, if you were starting with $500 and adding $500 per month using STW, your returns would have looked something like this.

This smooths out the returns considerably as you are effectively earning as you save.

Hope this helps!