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URL:  http://boards.fool.com/quotbut-if-i-changed-the-formula-to-allow-the-29120125.aspx

Subject:  Re: Loaded Funds, IRA Date:  2/21/2011  11:58 AM
Author:  MajorMajor78 Number:  68523 of 75802

"But, if I changed the formula to allow the advisor option to be returning 1% more than the Vanguard option per year, then it was a wash. If the advisor option made 1.5% more per year, it was better to be with the advisor."

Your math is accurate enough for a rule of thumb. I havn't botherd to break out the calculus on a problem like this since college. Here's a link to an article that goes into why so many activly managed funds fail to beat the stock market after their fees and included.

http://www.marketbeaters.com/beat-the-market/

The problem comes in that the overwhelming number of these fund managers can not SIGNIFICANTLY beat the market on an annual basis. There have been a few expections over the years and even some good examples of funds that beat the market for years and then lost all the gains because of one error in judgment by the manager. Fidelity's Magellan fund is a prime example of this. That fund outperformed the market by a solid margin for a long time then got hammered extra hard in the dot com fiasco. One mistake and psft!!! All the extra gains gone. It is possible to beat the market but the statistics are clear. Putting your money in an actively managed fund will give you a much higher probablility of underperforming a broad market index over the course of 20+ years.

Does this mean that it is impossible to get better than average returns from investments? Of course not, good fundemental analysis and carefully choosing a solid and diversified portfolio can yield higher gains and if you do it yourself since you do not have to poll-vault your returns over high bar set by the fees just to break even.

Good stock picking has a much higher risk/reward component to it than indexing so it will always remain popular. Actively managed funds on the other hand are almost a suckers bet. Most of these managers DO outperform the market by a slight margin more often than not but then their fees drag the returns back below the market average. Think of it like racing a muscle car vs. a sedan. You get to the end of the course and the SEDAN WINS!!? How is this possible!? Then you look down and realize the parking break was set the whole time... it's kinda like that.

The best advice I can give you is to do passive indexing until you gain enough skill/desire to buy your own stocks. Or you could do what a lot of people I know do and have a majority of our portfolios in index funds and then have a modest portion dedicated to individual stocks.

Scott
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