A lot of those in the finance world don't want you to know about that because if the average person found out that by investing in the index, they would beat the majority of the "professionals" the majority of the time, then these guys would not have jobs.
Additionally you are paying fees on top of it for sub prime service. Fees that lower your overall return to such an extent you'd have 80% than if you just invested in the index and not paid for fees that provided below market returns;
So, if you want to have an intellectual equivalent to a doctorate in finance, with honors, just invest in the index. No need to waste eight years getting letters behind your name that mean you'll probably fail to beat the index. Plus, everybody should know worship and love Morningstar.
www.morningstar.com
That alone will save you the four years it would take to get your bachelors.
7 comments:
You're assuming that everyone who invests money isn't sensible enough to do some of their own basic research first. That's probably true for some, but then they deserve what they get.
I'm not in the USA, but here it's easy to invest in a tracker. But why would you? By definition you can't outperform the market if you track it (plus spread and error), so why not use a fund. Or fund of funds (mmmmm, fees). Sure, if you're in the middle of a bull market then using a tracker will be "okay", but otherwise you're wasting time and money.
Hint: if you'd invested your cash in an S&P500 tracker 1 year ago, how happy would you be today? Answer: not very happy at all (down 10%-ish).
Nothing beats proper stock selection and a balanced portfolio. encompassing stocks, derivatives, commodities, funds and cash. Besides, for most people success is beating interest on cash returns (ie: bank account), and 6% is perfectly achievable.
-Sergeant Security (poster of the airline security comment).
So true. Computers don't buy boats.
Lately, I've added Prosper.com lending into my mix. Absolute market destroying returns to date.
Hey Capt. I have a couple of nifty graphs along with explantion of same that, well, if you haven't seen this stuff will spin your little head around.
Also makes me wonder what Bill Gross and Paul Macauley do with all their time having missed this stuff.
However I may have to keep it a secret from the world unless you consent to release to me Jeff Cosford that most top secret of personal data your e-mail address.
Mine however, not so secret jcosford@shaw.ca
It get's worse - when you risk adjust the returns of that universe of portfolio managers - you find out that fewer beat the index and the ones that did had to add a significant amount of volatility.
Don't Mutual Funds include bonds to balance investments? And bonds usually have lower yields?
So what's the easiest way to invest in the index?
My retirement savings plan at work has nothing but index mutual funds for stock investing. I'm sure you can set up an account with a discount broker such as Scottrade or TD-Amertrade or equivalent and purchase index funds.
But, if you have a 401k or 403 savings plan at work, check out your available investment options there first.
One thing I'm testing is Smart 401K - it's a low-cost advisory service where they look at your company's investment options, takes your risk profile and sends you recommendation once a quarter. I just started the service, so I don't know how helpful it will be.
The other approach is to spend a lot of time with Morningstar and look at long term track records for various managed funds in various fund types e.g. Large cap growth, large cap value, small cap growth, small cap value, mid-cap etc. and carefully pick the best funds in each fund type.
While this is a good approach to screen funds, what sometimes happens is that a successful fund is managed by a superstar manager and the manager moves on and the fund suddenly doesn't do as well. You really want to find the most talented managers - so to speak the Michael Jordans of mutual fund managers and stick with them, which is not easy.
I don't recommend buying funds exclusively in a fund family. Seldom will you find the best funds confined to a single family.
Whenever buying a fund, avoid those with loads - there are plenty of good funds that don't have loads. Also, look at relative expenses for funds. Also consider the turnover of stock in actively managed funds. The more turnover, the more capital gain distributions you'll have to pay income tax on.
Last, and this applies to both index funds and actively managed funds, you will want to diversify into with different typoes of funds.
With an index fund approach, you'll probably want one S&P 500 fund, another broader index fund such as a Russell 3000 or Wilshire 5000 fund and perhaps a global index fund too. - e.g. an S&P (large company) index fund, and a Russell 3000 (small to mid sized company) index fund, a percentage in an international fund, etc.
Likewise with an actively managed portfolio, you'd want a large cap growth fund, a large cap value fund, a mid-cap value fund, a mid-cap growth fund, a international fund, and perhaps 5% is a emerging markets fund.
If you need help with this, do get a fee for service advisor - one that makes money on a fee basis and not on a commission basis. You can see the obvious conflict of interest with a commission compensated advisor.
I have holdings in around 10 individual stocks - but I'm gradually working away from individual stocks. Partly because individual stocks have much higher risk than a mutual fund and stockpicking is not a trivial matter -even the pros have trouble doing it consistently. When to buy in is often difficult to determine. Of course, then you have to watch the darn things closely and then decide when to sell, which isn't as easy as it sounds. If you're into individual stocks, www.zacks.com provides a weath of information.
Yes, you can get trackers and stuff, but it wasn't too long ago where virtually everyone thought ENRON was such a wonderful stock. And before that, the tech bubble with all sorts stocks that are now gone... poof!
If you like to play with individual stocks, it's ok to play with a small amount of your investment funds, but I can't recommend investing all of your assets in individual stocks.
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