The great investment race: active funds vs. index funds

When Alex and Jordan started their first jobs at 25, they both wanted to invest wisely for retirement. But they took very different paths with their 401(k) choices.

Alex chose a low-cost S&P 500 index fund with an expense ratio of 0.05%.

Jordan went with an actively managed mutual fund, which promised to "beat the market," but came with a 1.2% expense ratio and frequent trading.

Both contributed $500 per month and earned an 8% average market return before fees.

Fast forward 40 years:

Jordan lost $318,000!

Even though Jordan’s fund had some good years, over the long haul, high fees and underperformance chipped away at his returns.

Alex and Jordan invested the same amount but ended up in very different places. The data is clear: the lower your fees, the more of your money stays in your pocket.

Actively managed funds have downsides

• High Fees Eat Into Growth: Jordan’s fund manager charged 1.2% per year, meaning less of his money was compounding.

• The Market Wins Over Time: Despite claims of outperformance, most actively managed funds fail to beat index funds long term.

• Unnecessary Trading Costs: Active funds often trade stocks frequently, racking up hidden transaction fees and taxes.

Stick to low-cost index funds and let time do the work.

Want to maximize your 401(k) and make smarter career decisions? Check out Becoming a 401(k) Millionaire for everything you need to know about building wealth for your future!