No. of Recommendations: 2
But the message I keep trying to get across is that better results ARE obtainable. And these results are more CONSISTENT than index funds. All it takes are the right tools and the exercise of a little intelligence to achieve those results.

Gee, what does this say about the vast majority of fund managers and brokers who can't seem to cut it? And by vast majority, I'm talking about almost all of them, particuarly when you look at their performance over time.

You're right!! It would seem that the "professionals" would be hard to beat. But when you look at the entire picture that they are faced with, it's a little easier to understamd. Per a recent TMF article, the S&P 500 is a "managed" index. The component companies of this index change on a fairly regular basis. The selection criteria are such that at any given time this index is made up of the "best" large-cap stocks. So it is hardly surprising that large-cap fund managers have a hard time beating the S&P 500. But about 22% of them do at any given time. But small-cap stocks, with their higher returns (and risks) allow the managers of these funds to top the S&P 500 on a much higher percentage basis (about 63% of the time). But these small caps are usually benchmarked against the Russell 2000 (which is only appropriate - let's compare apples to apples).

Intelligent investors can get good returns because they can limit their stock portfolio to a small number of diversified stocks (or get their diversification through a few mutual funds in addition to their stock holdings). But the fund manager must own a minimum of 20 stocks because, by law they cannot INCREASE their holding in any given company beyond 5% of the value of the fund. And, by law, they can't own more than 10% of any given companies stock. So the larger the fund, the harder it is for the fund manager to limit their holdings to just the "best". They have to start adding in some marginal stocks just to stay fully invested. This is why small funds often outperform larger funds and why smart companies, more interested in their clients than big paychecks from fees, close funds when they reach a certain size.

And with funds moving from catch-all "capital appreciation" funds (like Fidelity Magellan) which can invest in just about everything to more limited philosophies like large-cap, small cap, bond, international, etc., the spectrum of stocks available to the manager decreases dramatically.

I use funds where I have to (403(b) and 457 plans) and also to provide needed diversification. And I pick stocks for my Roth and taxable accounts in order to boost overall returns. And that's what works for ME.
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