Comments on: Financial Question Of The Day: Do you prefer index funds or mutual funds? http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/ Personal Finance Blog, Your Guide to Financial Fitness Thu, 09 Feb 2012 21:28:00 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Mitch Tuchmanhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5621 Mitch Tuchman Fri, 14 Mar 2008 19:56:40 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5621 The question is really not framed correctly. Its not about picking a mutual fund over an index fund. Rather its about thinking you can "pick" good managers (or stocks for that matter) as a way to boost investment returns. This is not what accounts for 90% of investment returns. In fact, its asset allocation which means -- "where do you have your $ invested?" If you are in gold and gold mining stocks this year, you're up 20% regardless of your picks. If you own GDX (index fund) or BGEIX (mutual fund) -- they're both up the same. The real way to make money is to focus on which asset class and THEN use low cost index funds to get that exposure. So what is your % in US stocks right now? Foreign stocks? Real Estate? And why? The joke is that Wall Street gets us all focused on stock picking and market timing and therefore we think about mutual funds vs index funds. This is the wrong way to think. The question is really not framed correctly. Its not about picking a mutual fund over an index fund. Rather its about thinking you can “pick” good managers (or stocks for that matter) as a way to boost investment returns. This is not what accounts for 90% of investment returns. In fact, its asset allocation which means — “where do you have your $ invested?” If you are in gold and gold mining stocks this year, you’re up 20% regardless of your picks. If you own GDX (index fund) or BGEIX (mutual fund) — they’re both up the same. The real way to make money is to focus on which asset class and THEN use low cost index funds to get that exposure. So what is your % in US stocks right now? Foreign stocks? Real Estate? And why? The joke is that Wall Street gets us all focused on stock picking and market timing and therefore we think about mutual funds vs index funds. This is the wrong way to think.

]]> By: ekrabshttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5620 ekrabs Fri, 14 Mar 2008 14:47:11 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5620 First, let me state outright that I am a fan of John "Jack" Bogle, so there's no misunderstanding about my personal biases. There are plenty of funds out there have can beat the market at any one time... but very, very few of them are capable of doing so on a consistent basis. In fact, the only claim to such a fame was Bill Miller of Legg Mason Capital Management, who HAD a 14 year streak of beating the market. The argument that one can find funds with returns of, say 13% to 15%, are unfortunately based on PAST performances, and PAST performances are no guarantee or indication of FUTURE performances. To see why that is a topic beyond the scope of this response... but for the keen investor, it is still a worthwhile endeavor. In fact, I can even say that my international fund performed rather well in the past few years, average around 25% to 30%. So, does that mean that I should throw all my money into that international fund? Well, if my year to date's performance is any indication (of -7%), I would venture to say NO. Please don't get me wrong though. I am what in my circle would call "weapon agnostic". As in, I do what makes the most sense to me, giving my current personal financial situation rather than what I think is better. For example, there are places for managed funds as well as index funds just as there are places for a hammer and a screwdriver. To me, it seems futile to debate whether one tool is better than the other. Not everything requires a hammer, and heaven help you if that's all you believe in.... So, in practice, I actually do a bit of both, depending on what appears to work best for my own portfolio. However, for the average investor starting out, I would most definitely recommend index funds to start out, if there is a choice. In fact, I recommend to read "The Bogleheads' Guide to Investing" for everyone who wants to get into investing! There's much more to be said about this and related subjects, but I think this will do for now eh? First, let me state outright that I am a fan of John “Jack” Bogle, so there’s no misunderstanding about my personal biases.

There are plenty of funds out there have can beat the market at any one time… but very, very few of them are capable of doing so on a consistent basis. In fact, the only claim to such a fame was Bill Miller of Legg Mason Capital Management, who HAD a 14 year streak of beating the market.

The argument that one can find funds with returns of, say 13% to 15%, are unfortunately based on PAST performances, and PAST performances are no guarantee or indication of FUTURE performances. To see why that is a topic beyond the scope of this response… but for the keen investor, it is still a worthwhile endeavor.

In fact, I can even say that my international fund performed rather well in the past few years, average around 25% to 30%. So, does that mean that I should throw all my money into that international fund? Well, if my year to date’s performance is any indication (of -7%), I would venture to say NO.

Please don’t get me wrong though. I am what in my circle would call “weapon agnostic”. As in, I do what makes the most sense to me, giving my current personal financial situation rather than what I think is better. For example, there are places for managed funds as well as index funds just as there are places for a hammer and a screwdriver. To me, it seems futile to debate whether one tool is better than the other. Not everything requires a hammer, and heaven help you if that’s all you believe in….

So, in practice, I actually do a bit of both, depending on what appears to work best for my own portfolio. However, for the average investor starting out, I would most definitely recommend index funds to start out, if there is a choice. In fact, I recommend to read “The Bogleheads’ Guide to Investing” for everyone who wants to get into investing!

There’s much more to be said about this and related subjects, but I think this will do for now eh?

]]> By: Jhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5618 J Fri, 14 Mar 2008 03:48:03 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5618 To clarify, my reference to "100+ years" is in reference to the track record of general stock and bond market performance (that is, the performance index funds mimic), and not the individual index funds themselves of course. To clarify, my reference to “100+ years” is in reference to the track record of general stock and bond market performance (that is, the performance index funds mimic), and not the individual index funds themselves of course.

]]> By: Jhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5617 J Fri, 14 Mar 2008 03:20:03 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5617 I'll add this ... you'll get MUCH more out of an investment plan that focuses on finding an asset allocation that fits your financial goals and risk tolerance, and the simply putting that asset allocation into action using low cost index funds with track records spanning 100+ years. Do this instead of searching for "top managers" of active funds in each asset class hoping that they weren't a flash in the pan, and hoping that they even stay on the job long enough to make a difference for you. Asset allocation is the investment strategy that pays off in the long term ... not finding hot stock or bond pickers and constantly checking in to see if they stay hot. Seriously, I thought this ship had already sailed in the "Personal Finance" community. I’ll add this … you’ll get MUCH more out of an investment plan that focuses on finding an asset allocation that fits your financial goals and risk tolerance, and the simply putting that asset allocation into action using low cost index funds with track records spanning 100+ years.

Do this instead of searching for “top managers” of active funds in each asset class hoping that they weren’t a flash in the pan, and hoping that they even stay on the job long enough to make a difference for you.

Asset allocation is the investment strategy that pays off in the long term … not finding hot stock or bond pickers and constantly checking in to see if they stay hot.

Seriously, I thought this ship had already sailed in the “Personal Finance” community.

]]> By: Jhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5616 J Fri, 14 Mar 2008 03:11:14 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5616 A simple google search on "index funds" should provide all the evidence you need. Or search on Amazon for "John Bogle". The onus on proof is on the non-indexer. Name some managers that have "beaten the pants off" the indexes for 20+ years. A simple google search on “index funds” should provide all the evidence you need.

Or search on Amazon for “John Bogle”.

The onus on proof is on the non-indexer. Name some managers that have “beaten the pants off” the indexes for 20+ years.

]]> By: authorhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5615 author Fri, 14 Mar 2008 02:17:55 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5615 J, there are plenty of wise fund managers out there with low fees that beat the pants off of index funds. why don't you enlighten us as to why we shouldn't invest if we don't know why index funds are so much better. J, there are plenty of wise fund managers out there with low fees that beat the pants off of index funds.

why don’t you enlighten us as to why we shouldn’t invest if we don’t know why index funds are so much better.

]]> By: Danny Tsanghttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5613 Danny Tsang Thu, 13 Mar 2008 05:39:34 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5613 I would normally say index funds like most other bloggers..but I'm starting to lean towards mutual funds with good investment philosophies. The reason is because I don't think the stock market will behave like it has for the past 3 decades. We've had a lot of booms and even Warren Buffett thinks those times are past us. So, for our generations it may be wiser to invest in funds that employ good managers to actually analyze data and make good decisions. I think market returns will be 6-7% annually max here on out. It can't just keep going up forever. At some time, some one (like a manager) needs to spot undervalued funds and buy them, while selling off the bad stuff. I would normally say index funds like most other bloggers..but I’m starting to lean towards mutual funds with good investment philosophies. The reason is because I don’t think the stock market will behave like it has for the past 3 decades. We’ve had a lot of booms and even Warren Buffett thinks those times are past us. So, for our generations it may be wiser to invest in funds that employ good managers to actually analyze data and make good decisions. I think market returns will be 6-7% annually max here on out. It can’t just keep going up forever. At some time, some one (like a manager) needs to spot undervalued funds and buy them, while selling off the bad stuff.

]]> By: Jhttp://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5612 J Thu, 13 Mar 2008 05:38:01 +0000 http://www.moneycrashers.com/financial-question-of-the-day-do-you-prefer-index-funds-or-mutual-funds/#comment-5612 The answer is index funds, and it's not even close. If you don't know why, you shouldn't be investing. The answer is index funds, and it’s not even close.

If you don’t know why, you shouldn’t be investing.

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