[MUSIC PLAYING] Brought to you by the EveryDollar app. Start budgeting for free today. So I'm not like an avid watcher of the Randy show, but I see a lot of clips online where you guys talk about mutual funds and investing in mutual funds. I was wondering, why do you recommend mutual funds over index funds? Great question, man. How old are you? 21. Lovely. And are you investing right now? Yeah, I've been investing since I was 15. Oh, my goodness. Dude, that's amazing. Who taught you that? My dad taught me a little bit, and I read about it. Nice. What have you been investing in for the past six years? So I was doing mostly index funds, but I like to play around, do some stock picks. But obviously, not a big portion of my portfolio goes towards that. OK, are you working full-time? Yeah, I'm in marketing. Nice. That's amazing. OK, and how much are you investing as a percentage of your gross household income? Probably like 25%, 30%. Oh, my goodness. OK, so you're going to be a multi-millionaire, regardless of this conversation that happens next. Can we agree on that? Yeah, OK. Where do you live, Matt? Right outside of Charlotte. Let her know, do you have your own house? You own apartment? You live with mom? Where are you living? No. I still live with my mom at home. OK, all right. Cool. How much do you make a year? Yeah. 80 to 90. Oh, my goodness. Dude, you're crushing it. So we're talking-- you're investing, like, 18,000 a year. Yeah. And you've got a 401k through your employer? No. I use a Roth IRA. OK, so what happens after you max that out? I just put on a regular brokerage. OK, great. So let's talk about index funds versus mutual funds. And for the listeners' sake, if they're like, what are these goober nerds talking about, index funds are basically passively managed mutual funds. So it's still a giant group of stocks, but it's tracking an index, basically a set list of companies. Whereas the mutual funds that are actively managed has an investment manager that is selecting the funds that make the list. OK, let's go even simpler for guys like me. When you say index, they're indexed, and they're passively managed. So index, there's no one running the show. It's just a set list of-- And so they pick-- I'm making these up. They pick. There's 500 companies, the largest US companies. And if they go up, then the index fund goes up. And if they just all go down, then the index fund kind of goes down. And over time, we hope these companies just keep getting bigger and growing. And then can companies fall off to S&P 500? Yes. Do you want to pop in? Yes. So the whole thing should be just going up over time. Exactly. And so index funds means nobody's driving, it's just following whatever it is. It's the autonomous vehicle of the investing world. You like that? You just ruined it for people. I know. There we go. Excellent. OK, OK. Is that a good summary, Matt? Because you know about this stuff just as much as we do. Yeah. I mean, one thing that's sort of important to note is that mutual funds sort of have built-in fees, right? You know what I mean? Correct? There's an investment manager. There's people to pay because this is their job to run these, exactly. So they do have fees. The perks of the index funds, as you know, diversification, which mutual funds have, low expense ratios, which index funds have, and predictability. And every investment rose has a storm. For starters, your index funds won't beat the market because it represents the market. Does that make sense? So you'll settle for the average of the market. You can never beat it. The goal of the mutual fund is that that investment manager is picking, is hand-selecting funds based on tons and tons of research that they're doing every day, day in and day out, in order to attempt to beat it. So let's say the market does 10%. Well, the goal of the mutual fund is to do 12% or 14%. Now, as we know, they won't hit that goal over the year. We don't have a crystal ball. We can agree on that. Do you have-- do you look for specifics in a mutual fund to try to hit those funds? Because I know 80% of mutual funds don't beat the market. No, that's actually factually incorrect. Morningstar did this article, and they said nearly 57% of mutual funds, these active US equity funds, they beat the average index fund peer over the 12 months through June 2023. So that means 6 out of 10 mutual funds beat the index. Wait, over how long? Over the 12-month period. They looked at-- here's the mutual funds did. Here's the peer index funded. 6 out of 10 beat the index fund. Right, but why are you looking at a 12-month period versus like, you know, decades? You can look at decades, and it's going to change depending on the decade you look at. And the truth is, there's going to be mutual funds that don't beat the index. And there's going to be years the index beats the mutual funds. And so the goal here is to slightly beat the copycat of the stock market, which is the index fund. And so the index funds also do have a fee. You'll see it listed as a 12B1 fee. And so that kind of makes up for the mutual fund fees there. So it's not exactly free. And here's the thing, we're not anti-index funds. There's a time and place. In fact, Dave Ramsey invests in index funds outside of retirement. You have that taxable brokerage account, right? Yeah. Dave would say index funds are the smart play there because of the low turnover. They're not moving things around as much, which makes the fees less. But in retirement, you're not having to pay those fees, because you're not worried about turnover, because this is a long-term play. And therefore, he invests in mutual funds for his retirement accounts, index funds, outside of retirement. So there's a time and place for both. What do you look for in a mutual fund, though? Well, there's a lot of pieces of it, including rate of return, the expense ratio, what the fund is made up of, who the fund manager is, have they switched the investment team recently? If it's been doing great for 30 years, and all of a sudden they switched the crew, well, that's something you want to look out for, because things might change. And we actually covered this in depth, Matt, in our investing essentials live stream. And it's not currently available, but just for you, I'm going to send you a link to watch that for free. How's that sound? Good. But isn't that sort of inevitable? I mean, if a mutual fund has a 30-year history with one manager, and I'm 21, and I want to invest for another 30 years, you know, isn't there pretty much a guarantee that the fund manager is going to change the fund management team? Sure, over time, you know, things may change, but what we're looking for is that longer-term track record. And so we're not going to choose a fund that's been around for a year. We prefer the one that has a track record of 10 or 15, that's had the same team with the same record of success. But dude, that's like saying, I don't want to root for the Yankees or the Astros, because they're going to have different players in a few years. The goal is you hope that they have guiding principles, and they have the same desire to win, and they have the same integrity over time. Some teams are better at integrity than others with those teams I just labeled. I know Kelly's looking at me, not the other two. Kelly's upset. But you see what I'm saying? Like, yeah, the fund manager's going to roll over, but it will change over time. Matt, here's the deal. We can argue all day, and I can tell you like this, but you can be a multi-millionaire just from your index funds. You don't have to ever touch a mutual fund if you don't want or are going to still be friends. You're doing great. The key is your savings rate. That's the key. That's what holding people back from having money. It's not the discussion of index versus mutual. That's for another time. But for everyone else listening, just freaking invest. Be like Matt. At 21 years old, invest 18 grand a year, you're going to have money in retirement, regardless of where you put it. And for what it's worth, George and I both put our money in mutual funds. Tell me a dummy. And me too. Create your free every dollar budget today, the simplest way to budget for your life.
