No. of Recommendations: 0
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 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 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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