Jim Cramer, the “Mad Money” cable TV host known for using his perch to preach stock-picking to the masses, has a simple message for retirement investors: Don’t buy stock-picking mutual funds.

Yes, he still believes that picking stocks is time well-spent for some, but in a recent episode of his hugely popular show Cramer launched into a tirade against the stock-picking industry, at least as it’s sold to retail investors via actively managed funds. And he unabashedly supported owning low-cost, simple index funds in their place.

“If you’re investing in mutual funds you’re most likely, well, to put it delicately — how about ‘getting hosed,’” Cramer said.

The reason why is cost, Cramer explained. Mutual funds make money by increasing the number of dollars they manage. That means spending money to attract new investors.

A small number of active mutual funds can beat the market, but usually only barely and not by enough to offset the fees they must charge to advertise and draw in those new investors — their real business model.

“What they’re being paid to do is bring in more money from you, from more investors,” Cramer warned. “That’s part of the reason why in study after study, year after year, it’s shown that the actively managed mutual funds underperform the benchmarks.”

The other problem is that mutual fund success, in the instances where it happens, tends over time to lose effectiveness.

“When a mutual fund delivers such great results for so long, if the manager is a decent guy or woman they’ll stop accepting new investors because when a fund gets too big it becomes incredibly difficult to beat the market,” Cramer pointed out.

Hold on to that thought for a moment. If the goal is to beat the market, and size makes it harder to do so, isn’t the better option to instead own the whole market, to just own the index? Cramer thinks so.

An index fund thus becomes the world’s best mutual fund, clearly the most consistently successful way to invest over time and one whose price of admission is extremely low.

That’s the reason the SDPR S&P 500 ETF (SPY), which owns the S&P 500 stock index, has a $167 billion market cap, nearly triple the No. 2 ETF — which also happens to track the S&P 500, the iShares S&P 500 Index ETF (IVV).

It’s also the reason a range of indexing ETFs have gained such broad allegiance over the past decade. They and their index-fund brethren are cheap to own and they deliver the kind of drama-free return retirement investors seek.

Cramer has some negative things to say about the proliferation of exotic ETFs, and he’s right. More choice is not always better, as he points out. But he’s also correct in arguing that there really are two kinds of investors: Those ready and willing to commit to being traders and to sweating the daily ins and outs of stock selection, and the rest of us.

Minimizing cost

For retirement investors, the choice increasingly is clear, Cramer contends.

“You want a cheap, low-cost index fund that mirrors the market as a whole, one that mimics the S&P 500. You have a vehicle that will let you participate in the strength of the market without spending the time picking individual stocks,” he concluded. “This may sound like a really simple solution, but don’t overthink it. The whole point of putting your money in the fund is to save you from time and effort to manage your own portfolio of stocks.”

We agree with Cramer’s general argument. We would add only that at least some retirement investors benefit from financial advisor guidance from time to time, and that owning a basket of index ETFs operating as a risk-adjusted portfolio is a better choice than a 100% stock portfolio, even if it is held as a single ETF. He likely would agree on both points.

Naturally, portfolio-quality ETFs can and should be absolutely minimal in terms of cost and minimalist in design. From there, simple rebalancing and cautious oversight are all you need to build and maintain an optimal long-term retirement plan.

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