Understanding the Author’s Investment Approach
The author prefers investing in index-based instruments, with a primary portfolio centered around a single low-cost ETF that tracks an index composed of approximately 10,000 global companies. This strategy involves regular fixed contributions adjusted annually for inflation or income changes.
In addition to the main portfolio, the author maintains “satélite” investment strategies with other types of investments, such as long-term UDIBONOS offering real fixed rates exceeding 5% annually. This approach allows for exploration of more adventurous investment options without jeopardizing the primary wealth-building objective.
Why Choose Low-Cost Index Funds?
Most professional fund managers worldwide fail to consistently outperform their benchmark indices over extended periods, despite occasional short-term successes. Moreover, top-performing fund managers frequently change, making it difficult to maintain consistent leadership in the industry.
Given these challenges, investing in low-cost index funds that replicate and generate returns consistent with benchmark indices is a more reliable strategy for most individuals. Numerous studies have demonstrated this approach’s effectiveness.
The Disparity Among Index Funds
While all index funds may seem alike, significant differences exist, particularly in Mexico. Many index funds marketed in the country produce returns significantly lower than their supposed benchmark indices due to two primary factors:
- Partial or incomplete index replication, where the fund invests in only some index components rather than all, and/or overweights or underweights specific stocks.
- Excessively high management fees charged by the product.
Low-cost index funds are a standard in developed countries, but this characteristic is often absent in Mexico. Many personal retirement plans and investment funds in Mexico have annual returns 3 to 6 percentage points lower than their reference indices, leading to substantial losses over the long term.
For example, investing 100,000 pesos for 25 years at a 10% annual return yields approximately 984,973.27 pesos. However, reducing the return to 7% due to higher fees results in only 507,236.70 pesos—highlighting the impact of fees and replication discrepancies.
Navigating Mexican Investment Options
Fortunately, Mexican investors have access to a wide range of low-cost global ETFs with annual management fees as low as 0.03%. These can be purchased through any brokerage firm.
When selecting index funds, consider the following:
- Ensure brokerage transaction fees do not exceed 0.25% plus IVA on the trade amount, and avoid additional monthly or annual custody, administration, or online information costs.
- Be aware of management fees charged by intermediary financial institutions, which can exceed 1% of the portfolio’s value.
- Recognize that numerous indices exist, which may complicate your decision. Consider whether to invest solely in the S&P500, focusing on large U.S. companies, or construct a portfolio using regional or sector-specific indices.
Key Questions and Answers
- Q: Why should I invest in low-cost index funds? A: Most professional fund managers fail to consistently outperform their benchmark indices, making low-cost index funds a more reliable investment strategy.
- Q: What are the common issues with Mexican index funds? A: Many Mexican index funds have high management fees and incomplete index replication, resulting in lower returns than their benchmark indices.
- Q: How can I find suitable low-cost index funds in Mexico? A: Look for global ETFs with low annual management fees (e.g., 0.03%) and ensure brokerage transaction fees, additional costs, and management fees charged by intermediaries are reasonable.
