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Author: uglierthanme Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: More Index funds ????'s Date: 2/3/2003 7:15 PM
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Just when I think I know what I know, someone comes along to ruin it.

First; all of these facts[?] are taken from a book
by Ric Edelman, titled
"Discover the Wealth Within You". He admits that he is a advocate of mutual funds, and makes a good share of his income from promoting them. I don't believe this makes him right or wrong, but is certianly enough to wonder about his objectivety.

Index funds in fact buy high and sell low whenever they replace a stock in the index. They rid themselves of the slackards {your outa here} and replace with a stock that has shown to be the new rising star. He continues to assert that the replacement stock will then have a above average drop over the next year as it has peaked out.

Taxes on a Index fund are only deferred {at best} yearly and will have a much larger tax due when sold, as opposed to a regular fund that one would be taxed yearly. Also, in a down market shares inside the index would have to be sold for those leaving the fund. - I don't know what he believes the difference is here as
I thought that was what all funds do.

I understand that others have spokan to the fact that some indexes such as the S&P 500 may work better as a Index fund than say a small capital growth since as a general rule there would be less turnover.

A good part of the book addresses the question of retirement as a question of time as much as money. He contends that {my words} many are in their comfort zone while working and without the struture we would then have to set our own goals and make our own decisions as to the route to get there. By doing this we are missing out on doing what we would enjoy doing instead of what we have to.

No doubt all of these questions/issues have been addressed numerous time but I would appreciate any feedback.

Thank-you
------------UG
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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35652 of 75383
Subject: Re: More Index funds ????'s Date: 2/3/2003 8:28 PM
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Index funds in fact buy high and sell low whenever they replace a stock in the index. They rid themselves of the slackards {your outa here} and replace with a stock that has shown to be the new rising star. He continues to assert that the replacement stock will then have a above average drop over the next year as it has peaked out.

Yes...dear Mr. Ric Edelman certainly contends this to be the case. But if this were consistently the case, wouldn't index funds consistently under-perform managed funds? Since the good index funds -- especially in the large-cap world -- consitently out-perform managed funds, I think this argument is full of hot air.

Taxes on a Index fund are only deferred {at best} yearly and will have a much larger tax due when sold, as opposed to a regular fund that one would be taxed yearly. Also, in a down market shares inside the index would have to be sold for those leaving the fund. - I don't know what he believes the difference is here as
I thought that was what all funds do.


Taxes are deferred...and that is a *good* thing. It means you are keeping the money and letting it grow more through the power of compounding. Eventually taxes have to be paid...but last I knew, the Vangaurd S&P500 fund (VFINX) had about $8 billion in deferred capital losses...it will take a lot of gains to wipe all of that out, so I would not be terribly worried.

For some of the other index funds (i.e. Total Market - VTSMX), there are Exchange-Traded Funds (ETF's; VTI in the case of VTSMX) that can be used to wipe out the capital gains in many cases.

And you are ight...there is no difference between the need to sell stock as shares of the fund are redeemed for an index fund vs. a managed fund.

I understand that others have spokan to the fact that some indexes such as the S&P 500 may work better as a Index fund than say a small capital growth since as a general rule there would be less turnover.

Turnover is one issue. Another is the ability to easily buy all of the stocks in the index in very nearly the right proportion. With small-cap indexes, one or both of these might be difficult. With the Total Market Index -- which tracks the full stock market of many thousand stocks -- the index funds only hold a sampling of the stocks. That sampling might be 3000 stocks, but it is still just a sampling leading to the possibility of increased "tracking error" -- the difference between the return of the index and the return of the index fund.

One thing to remember was something you stated up front -- "He admits that he is a advocate of mutual funds, and makes a good share of his income from promoting them." He makes no money from promoting index funds...so I would be inclined to think his dislike for them has at least a little bit to do with the padding of his wallet...

Just my thoughts...

ACME

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35661 of 75383
Subject: Re: More Index funds ????'s Date: 2/5/2003 5:18 PM
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Index funds in fact buy high and sell low whenever they replace a stock in the index. They rid themselves of the slackards {your outa here} and replace with a stock that has shown to be the new rising star. He continues to assert that the replacement stock will then have a above average drop over the next year as it has peaked out.

I don't think this is true. Most indexes and therefore the funds that follow them are market weighted. When they first appear on an index they tend to be small in comparison to others on the index. If they are sucessful and follow the business cycle of so many they then grow in size (the rising star) and the index takes advantage of that growth as well as the dividends (if any) that the company pays out. When the company becomes the slackard I would concur that the price will drop but can think of no reason that the drop should be more than average. The slackard is then replaced by another rising star but which has a low position on the index list.
My thinking is about broad based indexes and may or may not share traits with something like a sector fund. If something is wrong in my thinking I would be happy to hear others ideas.

Bob

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