Having funds is fun. What you do with them, however, takes some thought.
Managing your funds well leads to "free money," and managing those funds poorly leads to owing people dough...or worse.
For the most part, we trust banks to hold onto our money for us. We deposit our paychecks, we pay bills and buy stuff from our accounts, and we depend on the banks to make sure that whole process flows smoothly. But who makes sure the banks are being responsible with our money? Who’s in charge of making sure that, if we go to the ATM and pull out $200, the bank has $200 to give us?
Banks aren’t the only ones putting the “fun” in funds management. All financial institutions need to make sure they have invested the money in accordance with the wishes of their investors, as likely detailed on the indenture of the fund itself. Young people with a long investment time horizon generally lean toward investing in smaller growth companies, which do well over time, but are relatively volatile on a year-to-year basis.
Old people with a toe or more in the grave already can't afford to take short-term volatility risk, so they tend to want their funds managed in safe bonds and/or cash stuffed under the Serta.
And the difference of even a modest number, like 5% a year, in fund management prowess, over a few decades of savings, is the difference in retiring at 72 with a million bucks...or with three million bucks, which can buy you a lot of fun.
Related or Semi-related Video
Finance: What are Active Investing and A...4 Views
Finance a la shmoop.. what are active investing and active management? Active
doing something, active as in trying to beat the market by trading stocks active [People riding a bike on stock market appears on board]
as in humans making decisions often with the help of computers trying to beat
their index or the overall market ie the S&P 500 that's what we mean by the
market active; investing.. active; management okay
passive just passive.. active is what hedge funds and mutual funds and any
kind of funds that have a strategy do they actively try to invest money such
that the performance of their portfolio does better than whatever index or
benchmark it's measured against and notice were not talking about after-tax [Man discussing active investments]
performance here because remember every time you trade in a taxable account
while the attacks men cometh but we won't go there right now..... Your benchmark
compare is versus the S&P 500 and you manage a broadly based mutual fund the
passive investing cousin in this investment is an index fund think ticker
SPY, that's the biggest S&P 500 index fund well index funds are not actively
managed they are passively managed they just sit there and get tweaked a little [Pile of money grows larger overnight]
bit each year or really each quarter to kind of mirror the S&P 500 or whatever
their index is supposed to mirror but they just kind of sit there there's no
human trying to beat the market they are the market index funds are the
market and yeah 99% of actively managed funds don't beat the market over any
extended period of year like five or ten years very few ever beat the market and
essentially none of them beat the market after taxes so then why would someone
invest in an actively managed mutual fund when they're paying taxes and
they're thinking about an index fund as a comparable well basically they're one [Mutual funds on a table and a lollipop appears]
of these so yeah don't be one of these guys
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