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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: of 75335  
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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