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That's pretty much what a I get from the Fool article on the main page right now:

http://www.fool.com/news/commentary/2004/commentary04072001.htm?source=mptoppromo

I have long since stopped recommending the Fool as a place for a newbie to come get financial advice. I used to feel bad, perhaps out of loyalty for reading the site daily for 5 years. But I don't feel bad anymore. The Fool has products to sell, and they'll do what any business does to sell it, regardless of if their product is 'good' or not.

The fool used to provide regular links to an article on index funds that said this:

http://www.fool.com/mutualfunds/indexfunds/indexfunds01.htm

Fools are certainly indebted to John Bogle, for showing clearly that -- contrary to what you may have read on countless magazine covers -- mutual fund investing is extremely simple: Buy an index fund.

(Psst. There's a reason that all these magazines don't tell you how simple mutual fund investing really is. Scientific marketing surveys and focus group testing have determined that magazines with covers that read "Index Funds: Still The Best Choice!!!" every single month really wouldn't sell as well as magazines that promise "Our BRAND NEW 10 Best Mutual Funds To Buy RIGHT NOW!" Sad, but true.)


And now they are doing JUST what they used to say NOT to do...so that they can sell 'magazines'.

The article on the main page has this to say:

My intent here is not to discredit index investing, which is fine in moderation, but rather to update the discourse of the debate. For simplicity's sake, I will focus exclusively on the S&P 500 index, as the discussion is protracted enough without involving the Russell 2000, the Wilshire 5000, or any of the other hundreds of indexes in use today. With that in mind, let's shed some light on three popular myths that bear closer scrutiny.

Focusing on the SP500 is a typical anti-indexing ploy. Indexing is a STRATEGY for making market returns, and in the world of investing which include large caps, small caps, value stocks, bonds, real estate, international companies, commodities etc., the SP500 is ONE slice...American Large Cap companies. What every happened to comparing funds against the right benchmark? WHO exactly is saying "just buy the SP500"? Certainly, indexing advocates at least push the Total Market Index (still heavy on the large caps though!) for "set it and forget it" investing. But then you need an healthy dose of bonds. So either buy a bond index fund yourself, or get a balanced fund. Anyway, give the hundreds of index funds that track all sorts of asset classes nowadays, it totally disengenuous to use the SP500 as a proxy for "index funds" unless you compare ONLY other actively managed funds that are large cap only, with the same average market cap. How have THOSE funds done against the SP500 in the past 3 years?

Anyway, I'm not going to go into a point by point breakdown of the invalid points of the new Fool article, as many on this board can do that better than I can. But let me just make 2 observations:

Myth #2: Index Funds are a quick, efficient means of achieving overall portfolio diversification.
Far too many investors have been led to believe that a properly diversified portfolio can be assembled by replicating the S&P 500 index, maybe adding a bond fund and throwing in a handful of tech stocks for good measure.


If investors believe that the SP500 provides adequate diversification, they are wrong. But that problem has NOTHING to do with index funds. Exceptional diversification can be acheived by 3-5 index funds: a bond fund, a large cap fund, a small cap fund, and an international fund. If you want, throw in real estate trusts, precious metals, whatever. See? GREAT DIVERSIFICATION ONLY WITH INDEX FUNDS! Wow, what a neat trick, huh? So re-read "Myth #2" and ask yourself why EXACTLY it's a myth? It's not. Why exactly do you need active funds to diversify? And with index funds, you can get "style-pure" funds, and know that your active manager isn't drifting towards other asset classes and "un-diversifying you" without you even KNOWING it.

Certainly, index funds have had a good run. Much of that performance, however, is attributable to a select few mega-cap stocks that were fueled by the momentum investing of the late 1990s.

No, no, no. INDEX FUND DID NOT HAVE A GOOD RUN. SOME index funds have had a good run. Such as large cap index funds. Again, statements like this confuse the issue. Similar deceptive statements are used to convince people to invest in high-fee variable annuities within an IRA...meaning it's easy to confuse the intro-investor, especially when you are loose with your language. I don't know if the author is ignorant of his words, or intentionally lying. He had previously written that he would focus on the SP500, which is ONE index. So why use the PLURAL as in "index funds have had a good run" when you are really only referring to the SP500? (yes yes I know that there are multiple "funds" based on the one "index")

A final word
Fans of indexing like to lecture about the wisdom of the efficient market theory: All stocks are priced perfectly, no undervalued stocks exist, and fundamental analysis is an utter waste of time. Therefore, they assert, beating the market is impossible, and even the best strategy is no better than a random coin toss. Either this theory is seriously flawed or the likes of Warren Buffett, Bill Miller, and Peter Lynch are extraordinarily lucky.


No, an occational fan of index funds believes in efficient market theory. I personally DON'T. But index funds are STILL better than active funds, because EXPLOITING those inefficiencies is difficult, and expensive. Once again, trotting out names like Peter Lynch and Warren Buffet is a diversion. Which funds are they managing right now that I can buy? And why does Buffet himself advise everyone to buy INDEX FUNDS? Peter Lynch is also quoted as saying the "majority" of investors should own equities through index funds.

Finally: In the game of investing, tying the market is as simple as kicking an extra point. Instead, find an active fund with a solid game plan for a successful two-point conversion and a winning portfolio.

Let's look at this analogy, since it's a good one. Kicking an extra point is successful 95% of the time. Making a two point conversion is successful less than 30% of the time. If you had 1000 chances at one-point or two-points, which would make you the most points? Your chances of picking the RIGHT mutual fund that is going to beat its target index after fees, expenses and taxes is VERY VERY SMALL.

I used to think the FOOL was a great site that was attempting to educate the public about investing. Now it's an on-line newsletter. It's sad. Why am I here? Well, habit I guess. I like some of the message boards. But I'm certainly not here to get any advice about investing. Like the Fool said, there is only so many magazines you sell by saying "index funds still the best!". I guess they learned the hard way this was only too true.

What's next, Motly Fool Brokerage Services and its own mutual funds? "For a 5% load you get personalized advice that will is well worth the cost!! Invest now!"
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