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Author: CentexHorn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76094  
Subject: How low do I let it go? Date: 6/14/2002 1:07 PM
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The S&P 500 index fund in my 401(k) is crashing and burning. It is down over 10% for the year...the NAV is down to about $9.
How low do I let it go before I buy more of it?
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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34675 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 2:02 PM
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The S&P 500 index fund in my 401(k) is crashing and burning. It is down over 10% for the year...the NAV is down to about $9.
How low do I let it go before I buy more of it?


Timing the market is a very dangerous game. The lucky win more often than the smart. If I knew how to time the market, I certainly would not be working today! I'd've taken $100 and parlayed it into several billion, and I'd be sitting on my own private island somewhere.

The answer to your question can only be found inside of you. What is your comfort level? What level would you be happy with owning more shares of that index fund? If you invested today, at $9.00, and the value dropped to $7.00, would you kick yourself for getting in too high? Alternatively, if you didn't invest today, and the value skyrocketed to $12.00, would you kick yourself for sitting on the sideline?

Following the day-to-day gyrations of the stockmarket is a sure way to get an ulcer. Planning your investment strategy on current price, and not on a comparison between price and underlying value is a certain way to get slaughtered.


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Author: CentexHorn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34676 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 2:20 PM
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The way things are going I might not have to wait long before I can buy it at $7........

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34677 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 2:59 PM
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Its very hard to get a sense of when an index is a good buy, hich is why I concentrate on individual companies. In my 401k I just set my contributions to heavy index allocations and ignore it. Maybe I'll look at the balances every month or so to make sure they really did deposit the money. After all, if you've got 10 or more years to go, what is there to get upset about?


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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34678 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 7:13 PM
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You should be buying the S&P500 index fund in your 401K EVERY SINGLE MONTH. If you are not doing this, you are a fool (small "f" type of fool) IMHO. Forget market timing and looking at prices.

The stock market is like a little boy walking up a hill while playing with a yo-yo. Stop looking at the yo-yo. Focus instead on the angle of the hill.

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34679 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 9:12 PM
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For the last year or so the boy has been walking DOWN the hill as far as the S&P 500 goes. Index funds are for those who haven't learned enough to take control of their investments or those who feel no discomfort watching 30% or more of their fund assets disappear and then take what seems like forever just to get back to where they were.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34680 of 76094
Subject: Re: How low do I let it go? Date: 6/14/2002 10:00 PM
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brwhiz wrote:
For the last year or so the boy has been walking DOWN the hill as far as the S&P 500 goes. Index funds are for those who haven't learned enough to take control of their investments or those who feel no discomfort watching 30% or more of their fund assets disappear and then take what seems like forever just to get back to where they were.

Hmmm, down the hill? I see the S&P500 boy walking up the hill at a 15% CAGR (compound annual growth rate) since 1982 (when I started investing). My portfolio's 20.5 year CAGR has done 17% per annum.

Over the last 135 years or so, the hill's "angle" has been at over 11% CAGR.

Seems like forever? I think you too confuse the yo-yo with the hill. I guess that's why I retired at age 38 (7 year ago) with a wife and four kids. I DIDN'T and DON'T confuse the two.

BTW, less than 2% of investors can claim to have beaten the S&P500 over the last 20 years. 5% over the last 10 years. And 20% over the last 5 years. If index fund investing were a school, it would rate an A+, and A, and a solid B.

In summary, broad-based index fund investing is a very smart way to invest. I did it for the first 13 years of my investing career.

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Author: andyz151 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34681 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 7:08 AM
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While Indexing might be for "those who haven't learned enough to take control of their investments" it is also for many of us, the best equity choice there is in our employer sponsored retirement accounts.

Given a choice between the high fee managed funds, most of which didn't come close to let alone beat the S&P, offered in my plan or the S&P 500 Index offered, this was not a tough choice. So your comment about index funds being for those who have much to learn is flat out wrong when applied to most work sponsored retirement accounts. Bet Enron employees wished that "had learned enough" to take charge of their investments and had plunked it all in an index fund.

Andy

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Author: CentexHorn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34682 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 11:11 AM
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Well whiz,
the actively managed funds offered by my 401(k) are down anywhere from 12%-17%. Plus they are more expensive than the index fund.
I've learned to take control of my investing enough to know that that is a bad thing.


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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34683 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 12:41 PM
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While Indexing might be for "those who haven't learned enough to take control of their investments" it is also for many of us, the best equity choice there is in our employer sponsored retirement accounts.

Sorry, I missed a category of investor for whom index funds might be a good bet. But there are funds out there (18 at last count) that had consistently returned over 20% CAGR for the last 1, 3, and 5 years. Maybe you should talk your plan administrator into including one of those in YOUR plan.

I'm limited to around 700 funds in my 403(b) plan and somewhere around 4000 funds in my 457. But that hasn't kept me from running circles around the indexed funds.

And everybody keeps mentioning "expensive" funds. Read page 69 of Peter Lynch's Beating the Street where he discusses loads and expense ratios. When considering loads, you need to calculate the net yield of a load fund for the period of time you plan to hold it before you can accurately compare it to a no-load fund. And Peter says "forget expense ratios"; they have already been included in calculating a funds yield. So a fund which CONSISTENTLY returns 14% with an expense ratio of 3.2% is far superior to a fund which CONSISTENTLY returns 12% and has an expense ratio of .02%. Actually the first fund is always the best choice whatever the expense ratio numbers.

Now, the beauty of a falling market is that your regular monthly contribution is buying you more shares of the fund than you were getting previously during the last year and a half. But that seems to be little compensation for the people I know who pull out their plan statements from mid 2000 and see what their funds were worth then. Their current balances are significantly below what they were back then, even though they have been pumping more money into their funds each and every month. Not many people can get past the emotional impact and calmly accept the drop. And maybe that's because nobody can say when the market is going to attain its former levels (some say it may be as long as 10 years) or they see portfolios which are rapidly gaining in value instead of shedding money.

If you're happy with the returns you're getting, and willing to wait out the slump, and not bothered by 30% drops in your funds values, then keep on keeping on. If you're not, then you CAN take charge of your investments and realize some OUTSTANDING returns. Right now my taxable accounts are beating the pants off of the S&P 500 even after commissions and taxes (33%).

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34684 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 3:51 PM
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brwhiz wrote:
Sorry, I missed a category of investor for whom index funds might be a good bet.

How about EVERYONE??

But there are funds out there (18 at last count) that had consistently returned over 20% CAGR for the last 1, 3, and 5 years. Maybe you should talk your plan administrator into including one of those in YOUR plan.

Hmmm, just pick one or more of the 18 out of 12,000 or so managed equity mutual funds (0.15%) and BINGO!! You're there! Wow!

Forget that, I have an easier way: out of 9277 active companies on the three major US exchanges, SIMPLY pick one or more of the the 14 stocks (0.15%) that have appreciated more than 2123% over the last year and BINGO! It's FAR BETTER than picking the right mutual funds.

Here are the magic 14 stocks: SUHG, JOYG, WGII, ANCPA, CTRLY, AWIN, GHVI, ASLC, CGAM, ITEB, MNCP, MMUS, IPSU, and CQB.

Tell YOUR plan administrator that you want one or all the above stocks in your plan <grin>!!!!!!!!!

And why stocks? Just pick the 6 or 8 (I can't remember because I never play) correct numbers on the Powerball lottery and you can forget about stocks for the next 5 generations of your family.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34685 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 4:24 PM
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galeno writes,

<<<<brwhiz wrote:
Sorry, I missed a category of investor for whom index funds might be a good bet.

How about EVERYONE??

But there are funds out there (18 at last count) that had consistently returned over 20% CAGR for the last 1, 3, and 5 years. Maybe you should talk your plan administrator into including one of those in YOUR plan.>>>>

Hmmm, just pick one or more of the 18 out of 12,000 or so managed equity mutual funds (0.15%) and BINGO!! You're there! Wow!

Forget that, I have an easier way: out of 9277 active companies on the three major US exchanges, SIMPLY pick one or more of the the 14 stocks (0.15%) that have appreciated more than 2123% over the last year and BINGO! It's FAR BETTER than picking the right mutual funds.

Here are the magic 14 stocks: SUHG, JOYG, WGII, ANCPA, CTRLY, AWIN, GHVI, ASLC, CGAM, ITEB, MNCP, MMUS, IPSU, and CQB.

Tell YOUR plan administrator that you want one or all the above stocks in your plan <grin>!!!!!!!!!

And why stocks? Just pick the 6 or 8 (I can't remember because I never play) correct numbers on the Powerball lottery and you can forget about stocks for the next 5 generations of your family.


Hey, I think you're on to something there galeno. I've always thought lottery tickets were "the forgotten asset class". <grin>

intercst



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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34686 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 4:38 PM
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Galeno--great posts, all of them! Couldn't agree with you more.

Best regards and cheers!
jtr

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34687 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 5:39 PM
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Sorry, I missed a category of investor for whom index funds might be a good bet.

How about EVERYONE??


Sorry, they aren't a good bet for EVERYONE. Anyone with enough intelligence to use the tools available to them can pick funds and stocks that CONSISTENTLY beat the S&P 500. Anyone who believes that ANY index fund is the BEST that you can do deserves the mediocre returns that their money is providing.

To repeat my original point, index funds are OK for some categories of investors, and those categories have been pretty clearly spelled out. The rest of us (and I know that I'm just one of thousands) are doing much better than the results obtainable by blindly following the roller coaster of an index fund.

As far as getting a fund added by your plan administrator, it is the fiducial responsibility of plan administrators to serve the members of the plan. I have been able to get 2 funds added to our 403(b) plan already and 3 others are on request and under evaluation by the administrator. If you DON'T ASK I can pretty much guarantee it WON'T HAPPEN.

I failed to mention that the 18 funds that return better than 20% CONSISTENTLY were selected from a universe of only 5977 funds that excluded specialty, sector, bond, or international funds so the percentage of funds that have CONSISTENTLE done this is actually 0.3%. I did make one mistake in my statement. I said the results were over 1, 3, and 5 years when actually they were YTD, 1 year, and 3 years. Many of these 18 funds don't have a 5 year history. A recent statistical evaluation of funds found that future performance of a fund only has significant correlation with the previous years results. Beyond that the correlation is pretty insignificant. It also found little correlation with manager's tenure.

There are, of course, those who are so completely biased toward index funds that no argument will make a dent in their reasoning. Those people have all the right in the world to keep investing in a way that satisfies them. But they have no right to attempt to negatively influence those who want to learn more about alternatives, when those attempts involve distortions and exageration in a misguided attempt to prove a point. These have no place in a learning environment.

You don't have to pick the rare stock that returns over 2100% to realize returns in excess of 20% CONSISTENTLY, although it is nice to get in on one of the skyrockets at the bootom of its climb. There are hundreds of stocks that give such results, and I am glad to own a portfolio of them. Is it as easy as blindly picking an index stock? No way!! I expend hours in research before investing in a company and then I keep an eagle eye on all my holdings to forstall any major losses. I sometimes make mistakes and lose some money, but never very much. And I occasionally miss out on a real winner that does a head fake downward before starting a rapid upward climb. But I learn from my mistakes and constantly try to improve my investing skills and the returns that I am getting. I have an open mind toward anyone else's opinion, rationally presented. But I reserve the right to determine the validity of that opinion with respect toward my own investing decisions.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34688 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 6:38 PM
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Many of these 18 funds don't have a 5 year history.

Then how do we know that these funds would do well going forward? For all we know, the managers of those funds could have just been lucky in their stock picking and their luck will run out. (Just random chance alone suggests that some funds will do better than the index for a limited period of time.)


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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34689 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 6:44 PM
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intercst wrote:
Hey, I think you're on to something there galeno. I've always thought lottery tickets were "the forgotten asset class". <grin>

I KNEW you'd understand intercst! I'm going back to baiting religious conservatives and feminists.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34691 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 6:46 PM
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brwhiz wrote:
Sorry, they aren't a good bet for EVERYONE. Anyone with enough intelligence to use the tools available to them can pick funds and stocks that CONSISTENTLY beat the S&P 500. Anyone who believes that ANY index fund is the BEST that you can do deserves the mediocre returns that their money is providing. <snip>

BEAM ME UP SCOTTY!!

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34692 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 8:10 PM
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BEAM ME UP SCOTTY!!

You can say that again!!!

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Author: Cptbutton Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34693 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 8:19 PM
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"BEAM ME UP SCOTTY!!"

The stocks canna tak'it any more, g'leno!


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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34694 of 76094
Subject: Re: How low do I let it go? Date: 6/15/2002 8:44 PM
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Many of these 18 funds don't have a 5 year history.

Then how do we know that these funds would do well going forward? For all we know, the managers of those funds could have just been lucky in their stock picking and their luck will run out. (Just random chance alone suggests that some funds will do better than the index for a limited period of time.)

Good question! But, then again, how do we know that the S&P 500 won't take 10 years to return to the break-even levels of mid 2000? The stock market took 20 years to return to pre 1929 levels - it COULD happen again; I just hope that it doesn't! As I have pointed out previously, if a fund or a stock fails to meet my performance criteria, then I liquidate that holding and pick up one that seems to present the potential to accomplish my goals. Yes, I make mistakes occasionally. And yes, it costs me a few dollars more in transaction fees or commissions. But it is the end result that matters. And the end result is how much your portfolio has increased AFTER taxes, commissions, etc. And I'm just not satisfied with anything less than 20% CAGR all the time.

Maybe the following might illustrate my points better. Using the premium fund selector at Morningstar.com I asked for all funds (out of the 14,000 plus) whose YTD, 1 Year, 3 year, AND 5 year returns beat the S&P 500. The result was 3956 funds or about 27%. So I added in the 10 year returns that beat the S&P 500. There were still 222 stocks left. So that tells me that there is nothing magic about an S&P 500 index fund, or any other index fund for that matter. If I could get this same probability in the lottery, I would play every day. And by the way, the odds on winning a lottery are a WHOLE LOT WORSE than picking the one stock that is going to increase over 2000%. The odds on most lotteries are about 10,000 times worse.

I keep reiterating that index funds may be the right funds for some investors, and their reasons don't matter. If they are satisfied with the returns they are getting, then that's perfectly OK. 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. If you feel uncomfortable with something that may take more time and energy, or that may present more risk if you don't keep a close eye on it, then by all means, stick with what you are comfortable with.

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34695 of 76094
Subject: Re: How low do I let it go? Date: 6/16/2002 9:26 AM
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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.

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34696 of 76094
Subject: Re: How low do I let it go? Date: 6/16/2002 10:07 AM
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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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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34697 of 76094
Subject: Re: How low do I let it go? Date: 6/16/2002 10:29 AM
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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.

That's what counts. Being able to sleep at night is what's important, at least as far as I'm concerned. I have a different approach, and that's what works for me. Best of luck to all of us, because we all seek the same thing--financial security.

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Author: jackrogue One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34698 of 76094
Subject: Re: How low do I let it go? Date: 6/16/2002 2:28 PM
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brwhiz posted 6/14/02 9:12 PM Number: 34679
"Index funds are for those who haven't learned enough to take control of their investments or those who feel no discomfort watching 30% or more of their fund assets disappear and then take what seems like forever just to get back to where they were."
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I hope to retire in 2011. I selected an S&P index fund as my largest retirement investment vehicle 11 years ago. I made that decision because I had "learned enough to take control" of my investments. I'm not interested in exercising the degree of investing "control" that brwhiz advocates; I have a REAL life away from corporate/fund research reports, spreadsheets and charts . . . . and THAT is what works for me.

Do I experience discomfort regarding recent fund performance? Yes.

Do I think bull market conditions similar to the '90's will return? Most definitely. Just as excessive investor caution is the current norm in this extended bear market, disproportionate exuberance will become the rule during the next great extended bull session. When the great American stock market returns to its former glory, the mostly deflated fund shares I am purchasing each payday during this prolonged bear market will likely make me grin.

Believe it.

. . . from http://www.fool.com/school/mutualfunds/indexfunds/sp500.htm
During the 1990s, the S&P 500 has provided an annualized return of 17.3%, compared with just 13.9% for the average diversified mutual fund. This 3.4% is explained first by understanding the fact that during the 1990s the S&P 500 (essentially an index of the 500 largest companies in America) has produced returns that are better than the rest of the market. One must first look at an index of the whole stock market, the Wilshire 5000 Index. The return for the Wilshire 5000 has been 16.3% during the 1990s, so you should count 1.0 percentage points as a "large-cap effect," bringing the gap between managed funds and the Wilshire 5000 down to 2.4%.

. . . from http://www.fool.com/school/mutualfunds/performance/record.htm
The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general. There is currently no reason to believe that this differential will improve, or that actively managed mutual funds as a group can ever outperform the stock market's average returns. For that reason, investors who are going to invest in mutual funds rather than in individual stocks should hold a very, very, very strong bias toward investing in index funds, which invest across the board in a stock market index.

Fool on . . .

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34706 of 76094
Subject: Re: How low do I let it go? Date: 6/19/2002 11:43 PM
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I hope to retire in 2011. I selected an S&P index fund as my largest retirement investment vehicle 11 years ago. I made that decision because I had "learned enough to take control" of my investments. I'm not interested in exercising the degree of investing "control" that brwhiz advocates; I have a REAL life away from corporate/fund research reports, spreadsheets and charts . . . . and THAT is what works for me.

I hope to retire in 2009. I got a late start on doing something about it in August 1998, so I have only the past 4 years of experience on which to base performance expectations. None of the index funds has EVER shown the level of performance I need to accomplish my goals. So I had to develop an alternative plan. And I too have a life outside my investments. I'm just willing to devote more of my time time and take more control over my investments than settling for the roller coaster performance of any of the index funds. I'm not advocating that anyone change their investing strategies if they are comfortable with their current plan. It's just that I know too many people who thought that index funds were the end-all of investments and are now bemoaning the huge hole in their fund balance.

I decided to see what difference there would have been in my financial condition if I had invested in the index funds that "beat the market as a whole". I went back to August 1998 and created a portfolio for the money which I had invested in my real portfolio. For 47 months I invested $3,000 each month in VFINX, the Vanguard S&P 500 index fund. And because I was too lazy to look up the applicable transaction fees, I ignored them and bought as many shares as the entire $3,000 would buy. I reinvested all dividends and capital gains disbursements. Even though about 66% of the money invested was into a taxable account, I ignored any taxes to be paid on these distributions that were reinvested. So, in effect, I created the best possible scenario for investing my regular monthly amount, producing the most optimistic result for this portfolio. So what have I got to show from the $141,000 that I would have invested over the last 47 months??? The munificient sum of 120,103.10 or an overall LOSS of just under $21,000!! And this is supposed to be the investment vehicle that beats the whole market???

On the other hand, my REAL portfolio shows a balance today of $228,657,60, a GAIN of over $87,000 or a NET SWING of $108,000!! And all transaction fees, commissions, and taxes were paid as I went with the funds in this portfolio, no money was added outside the monthly $3,000. This is my NET, NET result as of today. Now tell me again how a LOSS of $21,000 beats a GAIN of $87,000. Yes, it took some time and effort, but it was fun and educational also. And that's what suits ME.

Do I experience discomfort regarding recent fund performance? Yes.

I would certainly think that you would. Knowing that every dollar that I had put into an investment over the last 4 years had lost money for me would not only cause me discomfort, it would annoy the he-- out of me!!

Do I think bull market conditions similar to the '90's will return? Most definitely. Just as excessive investor caution is the current norm in this extended bear market, disproportionate exuberance will become the rule during the next great extended bull session. When the great American stock market returns to its former glory, the mostly deflated fund shares I am purchasing each payday during this prolonged bear market will likely make me grin.

I'm grinning right now!!! And I don't have to wait for some possibly nonexistent future raging bull market to recover lost money. I've got my gains now. And by the time you reach just the break-even point on your investments, I'll probably be another $20,000 out in front.

. . . from http://www.fool.com/school/mutualfunds/indexfunds/sp500.htm During the 1990s, the S&P 500 has provided an annualized return of 17.3%, compared with just 13.9% for the average diversified mutual fund. This 3.4% is explained first by understanding the fact that during the 1990s the S&P 500 (essentially an index of the 500 largest companies in America) has produced returns that are better than the rest of the market.

Well, there's a couple of things wrong with the above statement. The first is taking as gospel any investment advice on TMF. Just remember that these are the same guys who sat on their thumbs and watched over $320,000 in gains in Celera totally evaporate even though one of the TMF staff writers said that there was no justification for the price ever going higher than its peak. And then to top it off, they watch another 50% of their original investment disappear before finally selling the dog. And the Rule Maker portfolio is bleeding red ink like crazy and has been for some time.

Nobody intentionally invests in the "average" mutual fund. There are very good screening tools available that in under 5 minutes will give you a list of 222 mutual funds that have CONSISTENTLY beaten the S&P 500 for YTD, 1 year, 3 year, 5 year, and 10 year returns. And since few funds' returns show any strong correlation with results from more than several years previous, you can drop the 10 year criteria and wind up with 3957 funds (27% of all funds available) that have outperformed the S&P for 5 years. I'm definitely not interested in whatever beats the "average" fund nor in anything that only beats 75% of all funds. I'm interested in the ones that beat 95% or more of the funds. I'm interested in the ones that provide a CONSISTENT CAGR of at least 20%.

Now, no one knows what any given fund will return in the future. And that applies just as well to index funds also. I am absolutely certain that there will always be funds that blow the doors off of any of the index funds. And that's where MY money is going to be, even if I have to move it from one fund to another on occasion.

. . . from http://www.fool.com/school/mutualfunds/performance/record.htm The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general. There is currently no reason to believe that this differential will improve, or that actively managed mutual funds as a group can ever outperform the stock market's average returns.

Here's our mythical "average" mutual fund again. I would expect it to show some rather poor comparison to the overall market since half of the mutual funds themselves outshine this straw dog. And no one is ever going to invest in mutual funds "as a group", at least not the group implied in the above statement, being a group of all actively managed funds.

One thing everyone should be cautious of is over-generalization (and that applies to me as well). Misuse of statistics, distorting facts, and erroneous conclusions lead us all into potentially painful traps. And the myth of index funds as the Super-Investment-Vehicle-Of-All-Time is just such a trap.

There are people for whom index funds ARE the ideal investment. And for those people, keep on keeping on. For the rest of us, we're always on the hunt for those vehicles that are going to get US to OUR goal. And that's the way it should be.


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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34712 of 76094
Subject: Re: How low do I let it go? Date: 6/23/2002 6:04 PM
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Author: brwhiz Date: 6/15/02 8:44 PM Number: 34694
Maybe the following might illustrate my points better. Using the premium fund selector at Morningstar.com I asked for all funds (out of the 14,000 plus) whose YTD, 1 Year, 3 year, AND 5 year returns beat the S&P 500. The result was 3956 funds or about 27%. So I added in the 10 year returns that beat the S&P 500. There were still 222 stocks left. So that tells me that there is nothing magic about an S&P 500 index fund, or any other index fund for that matter.

I used to think like you do, but I have learned.

You need to read two books: 'A Random Walk Down Wall Street' by Burton Malkiel and 'Common Sense on Mutual Funds' by John C. Bogle.

Both books supply ample evidence that the best way to find next year's loser is to buy this year's winner!! And, the more years that a managed fund beats the S&P 500, the more likely it is to NOT beat it in the future.

There is also the largely hidden issue of 'survivorship bias'. One big problem with the Morningstar system you've been discussing is that failed funds (which underperformed the S&P 500) disappear and are not included in the percentages. If these failed funds, and there are a ton of them, were included, the percentages that beat the S&P 500 would be much lower.

So, what you are actually doing is selecting funds that are most likely to do poorly next year. So far, you've been lucky, but it will catch up to you in time.

RK

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34738 of 76094
Subject: Re: How low do I let it go? Date: 6/25/2002 11:00 PM
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You need to read two books: 'A Random Walk Down Wall Street' by Burton Malkiel and 'Common Sense on Mutual Funds' by John C. Bogle.

Random Walk has been around since the middle 70s. I've read it several times, but not lately. I seem to recall that the major premise of this book is bogus. This failed premise is that everything affecting the price of a stock has been 100% discounted into the price of a stock at any given time.

I haven't read Mr. Bogle's book as yet. I may stop by the library soon and see if it is worth adding to my library.

Both books supply ample evidence that the best way to find next year's loser is to buy this year's winner!! And, the more years that a managed fund beats the S&P 500, the more likely it is to NOT beat it in the future.

I've seen both of the opinions presented before in other places. The evidence I've seen presented in support of these conjectures usually falls apart when examined thoroughly. The common fault is that data which supports the opposing case or weakens the strength of the arguments presented, are ignored, disregarded, or dismissed. If these conjectures were true then top ranked funds would spring into being as the #1 ranked fund and then decline from there. That is definitely not the case. I will definitely take my chances with a fund that has a CONSISTENT tendency to beat the index funds. And if it starts to decline, and fails to meet my performance criteria, then I will move my money into some other fund that's busting chops on the S&P 500. I don't sit around watching my money sluff off 35% of its total worth and then hope that someday I'll have the money back and can start realizing some gain once again. Latest projections by a number of well respected and well known market predictors indicate that the market may only recover at the measly rate of 7% to 9% per year. So that means another 4 years of watching that "market beater" inch slowly back to the point it was at in September of 2000. Six years of going nowhere!!!

There is also the largely hidden issue of 'survivorship bias'. One big problem with the Morningstar system you've been discussing is that failed funds (which underperformed the S&P 500) disappear and are not included in the percentages. If these failed funds, and there are a ton of them, were included, the percentages that beat the S&P 500 would be much lower.

A ton??? That's a rather vague quantity. It's hiding behind imprecise numbers that tends to cast doubt on a persons argument. What are the NUMBERS??? If the number of failed funds in the last 5 years is 1000 (highly unlikely) then the S&P 500 beaters still come out at 25%. Not what I'd call a significantly lower number by any means.

So, what you are actually doing is selecting funds that are most likely to do poorly next year.

A conjecture for which I've seen no conclusive proof. This is the kind of statement that gets repeated often enough that people actually begin to believe that it's the truth, when in reality, it's just unsupported opinion. And my actual, real money investing over the last four years tends to demonstrate the real truth of the matter. There is absolutely no way that you can begin to convince me that 3957 funds are suddenly going to drop below the S&P 500 index fund performance next year. It's just not credible. But that's what would have to happen to make your statement credible.

So far, you've been lucky, but it will catch up to you in time.

Another statement for which there is no basis in fact. It's just another unsupported opinion. If I threw darts at a list of funds as a means of selection, then you might have some actual basis for your statement. But I take great pains in selecting the funds and stocks into which I place my money. And I watch developments with an eagle eye. I see absolutely no sense in sitting idly by and watching tens of thousands of dollars just evaporate when a fund's NAV drops 30% to 35%.

You invest your way and I'll keep on investing my way. Right now I seem to be way out ahead.

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