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Is there a set-it-and-forget-it way to invest?
September 3, 2007 8:09 PM   Subscribe

I've got about $3,000 per month to invest, and I don't have time, knowledge, or energy to "beat the market". What's my best safe bet?

I've done loads of research on all the dummies-level investment info and I've come to the conclusion I should probably invest in some index funds. I've got an account at Vanguard but they offer a zillion different funds. Is there a general risk level I should take (like 80% stock/20% bonds that people often toss around)?

I'm already maxing out my retirement, my credit cards are all paid off, and my house is my only debt. I'm doing well at work and want to do more than simply toss it into a 2% savings or 4% money market checking account. Ideally, I'd like to see 10% gains year after year with this.

Aside from index fund research, I haven't done much else, so I'm a complete novice at any other sort of investing.
posted by anonymous to Work & Money (42 answers total) 42 users marked this as a favorite
 
I'm a complete novice too, but just to help expectation-set, I think 10% gains year after year is unlikely. 10% average gain after a number of years, though, maybe.
posted by altcountryman at 8:19 PM on September 3, 2007


Look for the index fund with the lowest fees you can find.

And- like altcountryman says - nothing consistently gains 10% every year. A little over 10% on average is about what you can hope for, historically, from index funds.
posted by ManInSuit at 8:22 PM on September 3, 2007


Given the credit industry woes, foreclosures, trade imbalance, bank shakiness, etc, I am awfully bearish on the market. I might be looking more along the lines of bonds or metals (gold & silver).
posted by zek at 8:23 PM on September 3, 2007


Also forget -- treasury inflation protected securities (TIPS) would be a good hedge.
posted by zek at 8:25 PM on September 3, 2007


Generally the stock / bond balance is supposed to move towards the bond side as you get closer to retirement. So, to make this completely dead simple, Vanguard has "Target Retirement" funds that do this for you, aimed at when you retired.

Or you could just buy Vanguard's 500 index fund (VFINX), like most of their clients do.
posted by smackfu at 8:25 PM on September 3, 2007


Berkshire Hathaway Inc. class B shares are currently going for 3-4K a piece.
posted by Mitheral at 8:29 PM on September 3, 2007


Put it into a low-fee index fund and forget about it. Vanguard is a good start; their 500 index fund is, IIRC, the original low-fee index fund. If you're investing for the long term, especially if you're young, forget about the bond market. Once you start needing some more security, you can start to shift the balance, but if you're young you should really be going with the risky stuff. If you're investing for the short-term, as in less than 10 years, you'll need a more secure mix.

There are going to be other people who chime in with better advice than me, but keep one thing in mind: you make returns based on risk. That about 10% average performance of the stock market (remember, this is before inflation, taxes, and fees take their toll on your profits) is higher than treasury bonds because the stock market is more risky than government-backed bonds. That triad of things -- inflation, taxes, and fees -- are what eat into a lot of profit. Fees are the only part of that you can control, so minimize them whenever possible.

If you don't have an IRA (that is, if the retirement you mention is a company-sponsored 401(k) or similar plan), max that out first. It's the government's way of guaranteeing you a return on your investment for retirement.
posted by kdar at 8:29 PM on September 3, 2007


Leave the stock market to the pros, it's a shell game.
Interview a few financial planners & ask them which mutual fund package they recommend. Set an automatic monthly payment on the ones you choose & forget about it.
Or get into real estate in the next year or two, now that the market is sinking.
posted by growabrain at 8:32 PM on September 3, 2007


seconding gold/silver bullion. caution on mitheral's berkshire hathaway, it's gonna get a haircut when warren buffett dies.
posted by bruce at 8:44 PM on September 3, 2007


I'm a big fan of JAOSX, but that's Janus not vanguard. I like stuff outside the U.S, because the dollar is dropping.
posted by delmoi at 9:02 PM on September 3, 2007


I don't know how it'll work for you tax-wise, but partially investing (like, 10-20%) in foreign markets might be a good idea. Go with the stronger indexes like the FTSE-100 (UK) and the DAX (Germany). This will hedge against anything that weakens either the American economy or the dollar. The risk is low-to-moderate.

Perhaps you might want to throw some money into East Asia, but that is high risk. Maybe if you had $30000 a year to invest. That said, China is unlikely to fall over before Beijing '08.

I would invest very minimally in gold or silver. You'll get some protection from a falling dollar, true, but considering its rapid rise in price since 2001, and the fact that lots of the people holding it need liquidity right now, your exposure to a sell off should worry you. Considering precious metals 'safe' is wrong. If you do buy gold, Krugerrands are an excellent way to invest.
posted by topynate at 9:11 PM on September 3, 2007


Broad based index funds (following the US economy) + t-bonds (safe as you can get, so you don't lose all your money) + speculative ventures in hedge funds, real estate, venture capitalism. People talk how on average these things make less money than an index fund. This is true, but you are not an average investor. You have knowledge of great money managers or deals coming through? Losing a little bit each year on the chance you might you win a lot is a good bet to have.

You really, really need a financial planner or broker to handle your money. The only broad advice I have is to avoid mutual funds. Your planner will have advice specific to your situation. Perhaps municipal bonds will substantially lower your tax expenses, etc.

Get yourself a private banker who can look at where your money is coming from and where it should go. 10% is not unreasonable depending on your investment objectives.

I'd go something like 30% index + 10% t-bond+ 60% speculative. It depends on so many things though.

N.B., this is not investment advice.
posted by geoff. at 9:51 PM on September 3, 2007


Oh and take any specific advice other than index funds and government obligations worth a grain of salt.
posted by geoff. at 9:54 PM on September 3, 2007


Maybe you should check out Exchange traded funds.

These are companies that hold other companies and are not actively managed (i.e. you buy shares in an entire index).

It also might be worth waiting until November or so this year when the sub-prime mortgage thing shakes itself out.

(NB this is not investment advice, if pain persists see your doctor, IANAL and you should call your kitten 'eric')
posted by sien at 10:12 PM on September 3, 2007


here's what you do:

1) open a month-to-month account at morningstar.com. Its about 10 bucks a month, but dont worry, once you know what you want you can cancel it within a few months. Its WELL worth it, because morningstar not only rates mutual funds and makes recommendations, but their write-ups also carefully explain their approach in ways that even newbies understand.

2) Basically at morningstar use the fund screener and pick one or two 5 star rated funds that the morningstar staff has designated as a "core" holding.

3) Contact those funds (either directly (morningstar provides website and contact info) or open a general brokerage account that offers those particular funds. (Hopefully you're doing all this in an ira account so that its tax free. Your broker can explain ira accounts to you).

4) set yourself up with those funds on an "automatic investing" plan (each month the amount you designate automatically gets invested from your checking account), and you dont have to worry about it anymore. Periodically about once a year check the funds rating on morningstar to see that its still recommended; if morningstar's rating has changed radically, pick another fund.

The 5 star funds at morningstar will generally beat index funds, thats why they're 5 star funds. There ARE fund managers out there (like bill miller, legg mason) who very reliably have beaten the index by significant amounts over a decade or longer. Setting yourself up with just a little bit of research at a site like morningstar isnt any more trouble than looking for an index fund with low fees. The long term gains, on the other hand, will be significant.
posted by jak68 at 10:31 PM on September 3, 2007 [1 favorite]


I'd recommended reading a couple books:
- Unconventional Success, by the Yale endowment's CIO.
and
- If you have time to get into it, the Intelligent Investor. You can skip some of the direct investing chapters and focus on the "Defensive Investor" chapters. Chapter 8 is considered by some the best essay ever written on the topic of investing. Graham wrote this book before index funds became widely available, but there are interstitial chapters that provide a modern interpretation of Graham's wisdom.
posted by mullacc at 10:34 PM on September 3, 2007


I'd just pay off the house as early as you can, but then again I'm irrationally risk-averse.
posted by Heywood Mogroot at 10:38 PM on September 3, 2007


I don't know how it'll work for you tax-wise, but partially investing (like, 10-20%) in foreign markets might be a good idea.

Only if you get the right sort of diversification. Financials in Europe took a big bite of the sub-prime shit pie, and certain kinds of broad-based hedging (i.e. one region's markets more or less offsetting another's) simply aren't as easy to pull off these days.

This is, as geoff. says, what financial planners are paid to do. Are you looking to do something with your investment in five years? Ten years? Twenty? Are you looking to have a certain amount that's available to liquidate quickly, should the need arise? Are you a portfolio-tweaker or someone who'd be happy, once the initial research is done, to treat it as a glorified bank account? Etc.

FWIW, Philip Greenspun wrote about the Vanguard index fund as part of a piece on investing way back in 1996, and made this very astute point on the psychology of investment:
Besides getting a higher average return, there are many other good reasons to invest your money in index funds. The first is psychological. When I had individual stocks, every time a stock went up, I attributed it to luck. Every time a stock went down, I attributed it to idiocy on my part.
Given the role of quixotic, unpredictable human nature in market fuckups, I like the idea of sheltering one's money from one's psyche.
posted by holgate at 10:42 PM on September 3, 2007


"SET IT AND FORGET IT"

Put a fixed amount every week (Vanguard will let you do it as often as every day automatically) into a Vanguard 500 Index. I figure the power of long term investing, dollar cost averaging, no load funds, and likely survival of the US stock market for my investment horizon all factor into me not having to do anything any more complicated for several years.

1. The market goes up? Hooray! I'm making money.
2. The market goes down? Hooray! I'm getting a bargain when I buy.
3. ??? (intervening 30-40 years while I work and do things other than tracking bond ratings, P/E ratios, reading puffery prospecti, or pay expenses to a fund manager making potentially unwise decisions)
4. Profit!

Look into Scott Burns and his Couch Potato portfolio.
posted by GPF at 10:51 PM on September 3, 2007


The 5 star funds at morningstar will generally beat index funds, thats why they're 5 star funds. There ARE fund managers out there (like bill miller, legg mason) who very reliably have beaten the index by significant amounts over a decade or longer.

I'm sorry, but this is some of the worst financial advice I've ever seen on AskMe. After paying expenses, actively managed funds do not outperform index funds. And if you annually reshuffled your holdings to buy 5-star funds and get rid of down-graded funds, you'll be digging yourself a hole by racking up additional fees. There are volumes and volumes of data showing this. Here's an example I quickly googled.

The problem with trying to find the next Bill Miller is that by the time it's obvious that the new guy is the Real Deal, it's too late to benefit. Highly-rated and out-performing funds get a huge share of new fund flows. And as Warren Buffett constantly reminds investors: size is the enemy of performance--i.e., the more money you have to invest, the more difficult it is to find investments that will outperform the market.
posted by mullacc at 11:08 PM on September 3, 2007 [2 favorites]


I don't know much about financial markets etc, but why don't you put that money towards your mortgage? That way you're guaranteed that you never lose your money _and_ it's like it's earning whatever your home loan rate is.
posted by Lucie at 11:16 PM on September 3, 2007


You already have your retirement, so I don't think that you need to be ultra-conservative with this. Precious metals / T-bills / etc. are good and safe, but they won't get you 10% consistently. For those kind of returns you are talking about stocks.

You already have a Vanguard account -- have you looked at the Vanguard 500? It's an S&P 500 index fund with very low fees and no load. The Motley Fool recommends it quite strongly, as do other people I consider clueful. (And as a result, I have money there.)

Depending on how much you have to invest, you could do 80% in that, and 20% in government bonds ... just be careful, I think Vanguard requires $10k per account to avoid all fees (if you do paper statements). Maybe it's cumulative across accounts, I'm not sure.

This money isn't really your nest egg -- that's your 401k (which I hope you have balanced appropriately for your age to produce a sufficiently acceptable level of risk) -- so I don't think you should avoid the stock market too rabidly. I guess if you're *really* bearish (like, you think the market is going to crash and burn hardcore in the next year), you could buy into the S&P slowly, using an automatic investment plan. That would limit your exposure but also ensure that you buy while shares are cheap, and require no input from you.
posted by Kadin2048 at 11:32 PM on September 3, 2007


I don't know much about financial markets etc, but why don't you put that money towards your mortgage?

A few reasons come to mind, since the poster can't respond without blowing his/her cover: there may be early repayment penalties; the poster may be locked into a low rate and/or have certain tax advantages from the mortgage interest deduction, etc. And in many cases, the simple magic of compounding gives the advantage to the investor.
posted by holgate at 11:50 PM on September 3, 2007


@mullacc: Efficient Market Theory and John Bogle not withstanding, there are a couple of dozen actively managed mutual funds on Morningstar's fund screener that have beaten the S&P regularly, especially the value stock oriented funds and international funds.

Why doesnt everyone just invest in the S&P Index? Because compared to the TOP actively managed funds that have license to move into sectors (Tech during the boom years, China during these boom years there, and so on) have indeed consistently beaten the S&P and their target indexes.

My mom's 401k sat in an index fund through the boom years and most of the china/india years, and it barely moved in relation to other actively managed funds that were offered in the same 401k. (My parents didnt know squat about investing and I had no knowledge of the horrible situation in teh 401k). I'll never make that mistake again.

Its NOT difficult to find the Bill Millers out there - thats the point of thorough rating services like morningstar's. Thats what they do - find Bill Millers and track their records.

Once you find highly rated funds, an actively managed fund is just as easy to set up with automatic investments and dollar cost averaging.

The trick is in finding them and thats where services like morningstar come in. Sure, if you dont want to even put in that much effort, by all means by the index and sit on it.
posted by jak68 at 12:12 AM on September 4, 2007


@mullac: Also note that Bill Miller's achievement wasnt in beating the S&P for 15 years -- (a LOT of funds have beaten the S&P (again, go filter for them in any good fund screener). Rather, his achievement was in beating the index 15 years IN A ROW.

That DOES NOT mean the other funds that have beaten the index arent ABOVE the index after 15 years. They ARE above the index after 15 years.

Again, for the love of the gods, use a fund screener and find good mutual funds. Sit on the index if you're really THAT lazy. But excellent actively managed funds are out there and all you have to do is pick them and then set up an automatic investment with them. Use a fund screener is all I'm saying.
posted by jak68 at 12:16 AM on September 4, 2007


I'm not going to bother arguing this because the data is out there to support what I said. In my opinion, you're ignoring fees, taxes and survivorship bias. I encourage the OP and anyone else reading to read the books I mentioned earlier--especially David Swensen's criticism of Morningstar in Unconventional Success.

Bill Miller has been a market-beating investor (and there are a quite a few more we could list). But he has more assets under management every year, which makes it much more difficult to continue his record into the next 15 years, and that's what counts. And it's becoming increasingly difficult to find the next "Bill Miller" because talent has moved away from mutual funds and into hedge funds or other institutional-only vehicles.
posted by mullacc at 1:08 AM on September 4, 2007


Pay off your debt first. If you haven't already, I suggest reading a book called the Zurich Axioms.
posted by arimathea at 4:53 AM on September 4, 2007


Gold.
posted by blacklite at 5:26 AM on September 4, 2007


(Though the real answer is: the more of a return you want, the more you have to think about it. If you want to put it somewhere and forget about it and make two digit returns a year, well, it isn't so easy. You at least have to keep general tabs on things, once a month, sit down, and evaluate your situation.

While it would be nice if money made itself, a bunch of money will generally only make money as fast as everyone else is making money.)
posted by blacklite at 5:30 AM on September 4, 2007


There's a lot of bad advice in this thread.

You're on the right path with Vanguard. You also already understand what kind of risk you're willing to take. I wouldn't count on 10% a year, but if you're comfortable with the risk of stocks then a Vanguard index fund will do you fine. There are other choices out there too, but if you're overwhelmed by choices Vanguard is a good place to start.

There are a lot of funds at Vanguard, but in reality there are just a few choices. If the web site isn't enough, give them a call! They can help you make your decision.

Here's a list of all Vanguard funds grouped by type. If you want basic stocks, you're looking for a Domestic Stock - General fund. The 500 Index Fund is the common choice there. Another option is the Total Stock Market index fund.

The other category of fund you may want to look at are the "Balanced" funds and the "Life-Cycle" funds. These are essentially fund-of-funds, blending a basic domestic stock investment like the S&P 500 with bonds, international stocks, etc. Read the description of the Target Retirement fund for your age, as well as the Balanced Index Fund, for a basic idea of how these work.

If you really want to get into it, consider making your own mix of stocks and bonds, both US and international. But that gets complicated.
posted by Nelson at 6:11 AM on September 4, 2007 [1 favorite]


bruce writes "caution on mitheral's berkshire hathaway, it's gonna get a haircut when warren buffett dies."

Geez do not buy a share every month, I'm sorry that is what I seemed to have implied. Buy one or two in total. The share holder side benifits (like discounted gieco rates) are the same whether you own 1 or 100 and yes the shares are going to take a bit of a hit when Buffett dies. However BH has averaged 25% a year over the last 25 years which isn't too shabby but also isn't likely to continue. There are a lot of smart people working for BH and if your interested in investing in a company they are a good bet.

jak68 we don't use the @username convention. Just the username is sufficient.
posted by Mitheral at 7:20 AM on September 4, 2007


I work in investment management and I would never tell anyone that they could expect 10% year on year. As other posters have mentioned, this is more likely over the long term, but I mean LONG term - 10 years being a minimum. Anything better would be a bonus.

I also agree that you will get better returns from an index fund than an actively managed fund. I have not seen any evidence that actively managed funds will outperform once all the fees are taken into consideration. However, the problem with index trackers is that you will not OUTPERFORM the market.

The first consideration that you should have is that you are maxing out all of your tax wrappers, such as IRA's. I can't make any further comment on specific products as I am UK based, but it doesn't make sense to be paying tax on investments when they could be growing tax free.

As far as the balance, this would of course depend on many variables, but a rule of thumb that people sometimes use is that the percentage of bonds equal your age, i.e. 30 years old = 30% in bonds. Obviously this is only a starting point and can be adjusted according to your risk tolerance.

I would also look at some sort of diversification, buy a couple of different funds, and if you are up for it try to get some exposure to Europe and the emerging economies, especially India and China. They are a bit higher risk but I think even if you have only 5% of your investments in them, that they are an important part of a balanced portfolio. There are funds out there that will lower your risk via adequate diversification. To further decrease your risk, look for non-correlated investments, which are investments that do not neccesarily move with the market, such as commodities, property, infrastructure, forestry etc. These are obviously different from the index funds that you are asking about and is where a good financial advisor would come in, if you are so inclined. I would definitely recommend staying away from putting all of your money into one thing, such as one company or even just gold. This is a very risky approach to investing. Collective vehicles such as mutual funds, investments trusts etc are the best route to diversification. I cannot stress the importance of this enough.

Exchange traded funds, as someone mentioned, are also a good choice. They are like mutual funds, though not actively managed (so lower fees), and traded in real time.

Despite the recent market volatility, I am not bearish on the market, there are in fact many who see this time as a buying opportunity.

A couple of people have mentioned dollar cost averaging and this is a great concept to learn about if you aren't familiar with it already.

Sorry if I am being a bit vague, but I hope this helps at least somewhat. Good luck!
posted by triggerfinger at 11:21 AM on September 4, 2007


Try google for "lazy portfolio".
posted by sfenders at 12:11 PM on September 4, 2007


Um, here are 200 mutual funds that have beaten the S&P500 over the last 10 year period.

http://screen.morningstar.com/FundSelector.html

Set the search critereon (middle of page) to "10 year returns - greater than s&p500' and then click "show results". You'll get 200 hits.

switch the 'view' to 'performance' and sort the column called '10 yr returns'. You'll see at the bottom the s&p has averaged 4 percent and change annualized over 10 years. You'll see 200 actively managed funds there that have TROUNCED that return.

I'm sorry, but you guys are the laziest bunch of investors i've ever seen, and apparently John Bogle (whose particular business it is to sell index funds over actively managed funds) has done a bang up job of propagating the myth that you cant beat the index with an actively managed fund.
posted by jak68 at 8:18 PM on September 4, 2007


That proves they were good funds. If only there was a way to prove they will continue to be good funds.
posted by smackfu at 8:39 PM on September 4, 2007


But smackfu, the entire assumption in stock investing is that good management (whether for a corporation, or for a mutual fund, or for anything financial) will continue to be good management; and if they start turning sour, you take your profits and put your money to work elsewhere.
With quality funds like these, just as with blue chip companies, cautious and seasoned managers rarely cause any catastrophic loss (not any more than in the market as a whole, which you'd feel in an index fund just as much). If you're in it for the long haul you will have plenty of time to switch over to another fund if you decide that management's performance is starting to lag. Just like with blue chip stocks.

There's no way around investment risk; you can only minimize it, and one of the time honored ways of minimizing it is to look at management's track record and bet that their expertise will continue to count for something.

Compound interest is what makes money in the long run -- and the difference between a 4 percent s&p index, or a 6 or 7 or 8 percent active fund, will amount to huge amounts of cash at the end of a 10 year period.

Its well worth putting in the *slight* effort it takes to screen for quality mutual funds, rather than settling for the dowdy s&p. we're not talking day-trading here; we're talking dollar cost averaging over a decade or more into the same fund or fund family. All you have to do is use the simple resources available to select an excellent actively managed fund company with a long history of excellence. There are dozens of them available. Despite what Vanguard would have you believe.
posted by jak68 at 9:02 PM on September 4, 2007


jak68, I am not arguing that there are funds that have beat the S&P 500 over the last however many years and I do not have time to look through your link at the moment but I do remain confident in the fact that there is not one major published study that successfully claims that managers beat markets by more than one would expect by chance.

I agree that if you think the market can be beat and are looking to outperform then active managment may be for you. There are problems with passive investing, such as not being able to outperform the market, as I mentioned above, but I would not disagree with the premise that index funds are better for most investors.

And while it appears as though you think John Bogle is the one perpetuating this myth that passive beats active, there are numerous studies that have come to this conclusion on their own. Independent studies, I might add, not the ones sposored by fund companies.

It seems as though anon is asking for the best way to invest their money without having to put too much time into the research involved in trying to beat the market and people are generally answering the question accordingly. While you are putting forward good arguments (this is, after all, a long-running debate), I don't think that accusing people of being "the laziest bunch of investors" is the best way of trying to get your point across.
posted by triggerfinger at 5:01 AM on September 5, 2007 [1 favorite]


Um, here are 200 mutual funds that have beaten the S&P500 over the last 10 year period.

Could you help me adjust the stock screener to let me know which of those funds will beat the S&P 500 in the next 10 year period? That'd be really helpful!

the entire assumption in stock investing is that good management will continue to be good management

No, that's the assumption of stock picking style investing. And the associated assumption, that you can reliably identify the good management.

The assumption of passive index investing is that the US economy and the stock market as a whole is growing, and if you take a 10+ year view you can very cheaply buy into that growth with relatively low risk.

Its well worth putting in the *slight* effort it takes to screen for quality mutual funds

What, like Fidelity Magellan? They were certainly the "quality" mutual fund for many years. Great managers, consistently strong returns, brand name mutual fund company. If you ran your fund screen anytime in the 1990s or early 2000s, they'd pop up high. You'd just ignore the 3% load and put your money in, it'll be fine! Shame about May 2006 though.
posted by Nelson at 9:26 AM on September 5, 2007 [1 favorite]


Sorry, I was at work earlier and only skimmed the comments. Piggybacking on the comment that Nelson pointed out:

the entire assumption in stock investing is that good management (whether for a corporation, or for a mutual fund, or for anything financial) will continue to be good management

That is incorrect.
Every investor needs to know that past performance is not an indicator of future performance. This includes fund managers as well as individual stocks.

The above link is a good one to read, but to highlight a point that is related to your statement:

Those funds that outperformed the index fund during the first ten years were unable, as a portfolio, to outperform during the second ten-year period. Therefore, the returns of the first period did not provide an adequate predictor of the second period. Note that the risk assumed by the two portfolios was similar.

As I said, if you do not believe in efficient markets, then this doesn't really matter as you will believe that superior returns can be generated through stock selection. But the general consensus is that developed markets are at least semi-strong form efficient.
posted by triggerfinger at 10:27 AM on September 5, 2007


"Every investor needs to know that past performance is not an indicator of future performance. This includes fund managers as well as individual stocks."

THAT is incorrect. Without the idea that past behaviour has some bearing on future behaviour, we might all JUST GAMBLE INSTEAD OF INVESTING.
You dont need to quote the "past performance...future performance" thing at me; That statement is of course "factually" true and it is also "practically meaningless" and is there to prevent lawsuits. it is one of these statements that could just as well be applied TO THE WEATHER -- "Past weather patterns are not indicative of future weather patterns" -- that is factually true but in a practical sense UTTERLY MEANINGLESS -- weather forecasting does not pack up and go home either as an industry or as a humanly useful activity -- The weather, weather patterns, like economic performances over the long term - is NEITHER 100% random NOR 100% predictable -- its called taking "calculated risks" - and again - intelligent investing in the stock market is ENTIRELY about taking calculated risks -- taht is the difference between "investing" and "gambling" - and i"m quite surprised at how many people in this thread dont seem to RECOGNIZE that difference and the practices and disciplines that it is based upon.
If past patterns in investing were not applicable for future investing decisions, WE MAY AS WELL GO TO LAS VEGAS AND GAMBLE. Now, if you're suggesting that the stock market is 100% a gamble , then WHY EVEN BUY THE INDEX? The SAME assumptions that go into investing in the index, would go into investing in a mutual fund with a strong track record. Both decisions are based on examining the dreaded "past performance".

As far as paying a 3% load -- if you read morningstar you will realize a 3% load is high and you would not pay it; their 5 star funds which have ALL TROUNCED the S&P500 dont have loads about 1.5%, and they've beaten the S&P by more than 5 percent in many cases, that leaves you even after paying their fee with a considerable advantage that will give substantial compounded cash benefits over a decade of dollar cost average investing.

Like I said, you can run a few simple screens to select quality mutual funds and come out the other end after 20 years with hundreds of thousands of bucks more; or you can sit on the S&P telling yourself that thats the most wise investing decision you've ever made.

Now, you're saying that index funds are better "for most investors". yes, that may be the case; all I was offering here is a suggestion for a slightly more intelligent approach that can be had with very little extra effort (run a damn fund screener, and listen to oversight companies like morningstar or lipper who make their living by tracking the batting averages of fund companies over decades and decades). If you do that much, which is very simple, at the end of a decade or two of investing, the difference will be HUGE thanks to compounded interest.

Its also true that if EVERYONE ran to these 200 funds, their advantage would dissappear -- and so I'm THANKFUL that the majority of you have no interest in doing that -- that helps secure those financial benefits for people like me who are willing to invest (quite sensibly) in more than the index.
posted by jak68 at 1:45 PM on September 5, 2007


Investing is a gamble. If you are that risk-averse, then put your money in risk-free assets. I don't think I ever said that there is no risk to investing in index funds. There is risk, but at least a person knows that they will not be paying a premium for it.

However, it is true that past performance is not an indicator of future performance. The evidence for this is overwhelming. You can see some of it in the studies done in the link in my last comment. You will see from the quote from the article that I provided that the funds that outperformed the index over a ten year period did not outperform over the next ten year period. Therefore, you cannot predict future performance from past performance.

In addition, the studies above also show that the cost of selecting the "wrong" manager can be high.

I have nothing against actively managed funds. They do offer the potential for higher returns. But I do think that an investor needs to be made aware of the fact that they cannot rely on historical returns for an idea of what returns the fund might produce in the future. If they believe the manager is talented and can outperform the market and is willing to make a gamble that they are right, they should. But to lead them to believe that they can predict the performance based on the last 5, 10 or however many years is wrong.

If they go and invest in a tracker fund, they will be taking the same gamble - past performance is no indicator - BUT they will not be paying a premium to do so.

The way I understand it, the OP was looking for a way to invest that does not require a lot of time, energy or knowledge. I don't think it is as simple as you make it seem for a lot of people who have no knowledge of investing to choose a fund and I know that people can easily get confused when looking into these things. It isn't that they're stupid. It's a complex subject that many people just don't have the time to research.

What I am saying is that index funds are a simple and cost effective way for an average person to invest their money and since there is no proof that more expensive funds can outperform, there is no good reason to invest in them. UNLESS a person is willing to take what is purely a gamble on the possibility of outperformance. If they want to do this, fine, but they need to go into it with their facts straight and their eyes open.

I don't know what else to say about this. I think the evidence supports my position, and it is easy enough to find, but I know that there will always be people who will believe, as you do, that past performance means something. This has been an ongoing debate for some time and it will most certainly not be resolved in this thread, so I think that we may have to agree to disagree on this one.

The Lowdown on Index Funds

Excerpt: It's true that over the short term some mutual funds will outperform the market by significant amounts. But picking the good funds out of the thousands (literally) that exist is almost as difficult as picking stocks yourself! Whether or not you believe in efficient markets, the costs in most mutual funds make it very difficult to outperform an index fund over the long term.

The Best Investment Advice You'll Never Get

Excerpt: A recent entry on the Motley Fool, the popular investment advice website, made the following blanket statement: “Buy an index fund. This is the most actionable, most mathematically supported, short-form investment advice ever.”
posted by triggerfinger at 11:47 AM on September 6, 2007


We all know Warren Buffet is never going to die. He'll just become liquid.

Also, I remember reading on one of those financial blogs that if you're 30, you should have 30% safe investments, and 70% 'risky' investments (If 40, 40s and 60r, if 2, 2s, and 98r, etc). Possibly a good rule of thumb.
posted by oxford blue at 8:22 PM on September 7, 2007


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