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Old 07-03-2008, 10:14 AM   #21
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well i've also come to accept the fact that it makes more sense to keep up with the market instead of trying to beat it. in order for an individual to beat the average, they have to do something better than that average return. in order to do better than that average return, that means there has to be some other guy who does worse than the average return. since the odds are that it's much easier to do worse than it is to do better, i'd rather just have funds perform as well as the market.
Exactly. Stick to that mindset, learn how to implement it (it's not hard, but there will be a lot of temptation along the way), and you'll be fine.

Sometimes the worst thing that can happen to an investor is to have a period of great, market-beating returns using in a stock-tip sheet or a managed, highly-concentrated mutual fund. They become convinced, like a first time lotto player who hits big, that they can beat the averages. The rest of the story --years paying higher fees, trading costs, the extra tax burden incurred when trading, etc--produces results which usually are substantially worse than a simple, well-diversified, low expense portfolio would have brought them.
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Old 07-03-2008, 10:56 AM   #22
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makes more sense to keep up with the market instead of trying to beat it. in order for an individual to beat the average, they have to do something better than that average return.
As long as you understand what 'the market' is. What is your understanding of the market? Many uninformed anti-indexes beat the dead horse of the s&p500 as the 'market' that their fund du jour is beating up on.

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over the long-term index funds always outperform other actively managed mutual funds.
Its a tricky thing, but indexes do not always outperform. They outperform the vast majority - there are still winners here and there in the active segment that manage to outpace an appropriate comparator index over the long term. The trick is choosing which active fund will be among the few winners 20 years in advance.

I am a diehard indexer (in fact, check out diehards.org if you want to be in company of others who feel the same way), but there are appropriate uses of managed funds I can think of. If you feel you need access to a market sector that you cannot obtain in an index, I would be comfortable using a low cost (< 0.60 expense ratio), no-load managed fund to do it.

Most important thing when comparing active vs. index is to get an apples to apples comparison. Many managed 'US Large Cap' funds appear to be aptly crushing the index over a span of time - when you look closely you'll see them sneaking dollars into foreign markets to boost their returns. This 'style creep' has the effect of changing your risk/return profile of your portfolio and you now have lost control of your asset allocation.

Two other books / authors I'd strongly recommend:
A Random walk down wall street - Burton Malkiel
Anything by Larry Swedroe
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Old 07-03-2008, 11:02 AM   #23
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As long as you understand what 'the market' is. What is your understanding of the market? Many uninformed anti-indexes beat the dead horse of the s&p500 as the 'market' that their fund du jour is beating up on.

correct me if im wrong but i took the market to be a fund like VTSMX. To me the S&P 500 is a smaller segment of that...500 large cap companies.
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Old 07-03-2008, 11:12 AM   #24
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correct me if im wrong but i took the market to be a fund like VTSMX. To me the S&P 500 is a smaller segment of that...500 large cap companies.
While the name of VTSMX is "Vanguard Total Stock Market Index Fund," and it does hold a large number of companies, investments in it will be cap-weighted, which means you'll own primarily shares in large companies. As you say, it is a good representation of the US stock market. But, most investors would not consider it a total solution to their investing needs (since it holds no international stocks, no bonds, no REITS, etc). Most people agree that international stocks are an important asset class in a well constructed portfolio. The advice was different 30 years ago.
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Old 07-03-2008, 11:29 AM   #25
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While the name of VTSMX is "Vanguard Total Stock Market Index Fund," and it does hold a large number of companies, investments in it will be cap-weighted, which means you'll own primarily shares in large companies. As you say, it is a good representation of the US stock market. But, most investors would not consider it a total solution to their investing needs (since it holds no international stocks, no bonds, no REITS, etc). Most people agree that international stocks are an important asset class in a well constructed portfolio. The advice was different 30 years ago.

oh i completely agree. i plan to have an overall asset allocation across various types of funds...my next one being international and most likely VGTSX. My options are to build up my liquid cash first or leave my advisor where I currently have loaded funds and use that money to invest in the index funds.
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Old 07-03-2008, 11:59 AM   #26
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Name***(Load)*** YTD *****1y***** 5y**** 10y
VTSMX** (N/A) **(-4.03)** (-5.45)** 8.44** (-1.15)
VIVAX** (N/A) ***(-15.5) *(-22.67)**30.39**(-3.31)
ABWAX**(A) *****(-9.59)* (-13.05) *22.55*** N/A
FNIBX** (B) *****(-8.56)**(-2.87)** 59.45**** N/A
EMHSX**(B) *****(-5.01)**(-19.03)***0.69** 159.13
EACFX** (C) *****(-9.77)**(-12.57)** 18.26* 31.85
I was just curious whether these performances are AFTER paying loads, selling fees and taxes...?
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Old 07-03-2008, 12:34 PM   #27
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I was just curious whether these performances are AFTER paying loads, selling fees and taxes...?
aida,

I don't know. My guess is before. I basically just went to Google Finance and plugged in the symbols and google spat out numbers of their returns over time periods. MY guess would have to be that's returns before taxes and fees.
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Old 07-03-2008, 06:57 PM   #28
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Two other books / authors I'd strongly recommend:
A Random walk down wall street - Burton Malkiel
Anything by Larry Swedroe
I haven't gotten to Malkiel yet, but I'll second the Swedroe recommendation.

2003's The Successful Investor Today is available on Amazon's bargain table right now. I picked it up and found it very much on target to the OP's question.

Excerpt here:

Amazon Online Reader : The Successful Investor Today: 14 Simple Truths You Must Know When You Invest
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Old 07-04-2008, 02:22 AM   #29
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I'm also a fan of index investing.
In the early 1990's I read all the hot fund articles and invested in the hot funds. Guess what? The funds that had done the best *before* I invested underperformed their indexes *after* I invested!

That's when the appeal of matching index performance began to look attractive.
You also have higher turnover rates in actively managed funds, which means more of your gains go to taxes. This doesn't show in the percentages that you posted and will depend upon your tax bracket.

Look at it like this: You have 100 people flipping coins. After 7 flips, ONE person flipped 7 heads! You say, "I'll invest with him, he has done great". And he proceeds to flip 50% heads from there on out. Was his 7 consecutive heads luck, or skill? How did your advisor choose the active funds you listed above? Did he pick the *hot* funds? What do you think the chances are that these funds will outperform the indexes into the future? Numerous academic studies have shown that few funds can continue their hot performances.
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Old 07-05-2008, 06:06 AM   #30
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I normally invest with a financial advisor through a large brokerage, and would like to weigh my options. Based on all the advice I've been given, I should eventually make the switch when the time is right and mainly invest in index funds, as it's the easiest, 'set it and forget it' way to go. Anywho, I just put together a little chart (got the numbers from Google Finance) of 2 index funds (Vanguard Total Stock Index, Vanguard Total Value Index) and compared those to 4 Loaded funds I'm currently invested in. Granted they're not as diversified as the two mentioned above, but then I compared the YTD, 1y, 5y and 10y returns for all of the funds.

What confuses me, is for the most part, the further out you go, it appears that the loaded funds appear to perform better. is there something I'm missing? (sorry for the terrible formatting, I did it to try and make them line up better.)

Name***(Load)*** YTD *****1y***** 5y**** 10y
VTSMX** (N/A) **(-4.03)** (-5.45)** 8.44** (-1.15)
VIVAX** (N/A) ***(-15.5) *(-22.67)**30.39**(-3.31)
ABWAX**(A) *****(-9.59)* (-13.05) *22.55*** N/A
FNIBX** (B) *****(-8.56)**(-2.87)** 59.45**** N/A
EMHSX**(B) *****(-5.01)**(-19.03)***0.69** 159.13
EACFX** (C) *****(-9.77)**(-12.57)** 18.26* 31.85
Prior comments about comparing apples to oranges apply. What you probably didn't include was the loads you'd pay that would reduce your investment returns. The reported returns you get from Morningstar and certainly from your FA would have neglected to include the load.
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