*** This article was mentioned in Time.com's money blog - It's Your Money, February 2010, "How NOT to Invest Your Money"
***
Answer this question
How do you rate yourself as a car driver?
a) Above average
b) Average
c) Below average
If you’re like most people (including me), you think you’re an above average driver. The truth is we can’t all be above average – that would defy the definition of average; it’s impossible. Some of us have to suck at driving.
Similarly, if you ask someone how good of an investor they are, chances are that they’ll say they’re an above average investor. How many times have you heard one of your friends talk about a surefire penny stock or a “hot” stock only for them to report back to you that they lost a couple hundred bucks on it?
What are some reasons why the average person shouldn’t try to act like an all-star investor? To answer this question, we’ll compare how the average person invests and what Warren Buffet, the world’s second richest man, has said.
The average person gets jittery and trades frequently when he invests.
He invests more when the market is going up and sells when the market is going down. It’s one thing to try and cut your losses by selling; the mistake that most people make is that they sell their positions, exit the market and then don’t get back in thereby missing the recovery.
In other words, the average person buys high and sells low – a terrible way to make money.
What does Warren Buffet say?
“One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover... but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise.”
“For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.”
The average person buys a company’s stock because he likes their products.
He doesn’t realize that although a company’s products are amazing, that doesn’t mean that its stock is fairly priced.
For example, let’s assume we expect that Microsoft will sell 1 billion Xbox units next year (that’s a lot, by the way). Does that mean that we should buy Microsoft stock? The average person would tell you “of course!”
What if I told you that Microsoft’s stock price reflected that Microsoft would sell 5 billion Xbox units? In that case - no, Microsoft stock would not be considered a good price.
But then, what if I told you that Xbox makes up such a small percentage of Microsoft’s earnings that it really has no effect on Microsoft’s stock price at all? Then, we’d both be wrong.
Note from Mike: For those who are curious, Xbox makes up 1% of Microsoft earnings. About 80% of earnings are from MS Office and Windows OS.
What does Warren Buffet say?
“Price is what you pay. Value is what you get.”
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.”
The average person buys shares of mutual funds that have high fees because he expects professional fund managers to make lots of money for him and to beat the market.
Fund managers charge a fee for managing your money. Like everything else in life, some funds are more expensive than others and charge more. Just because a fund is more expensive, that doesn’t mean that they can provide better returns for you. The only guarantee is that they’ll take their fee.
What does Warren Buffet say?
"If you have 2% a year of your funds being eaten up by fees you're going to have a hard time matching [the market]… people ought to sit back and relax and keep accumulating over time."
“And that's where we are today: A record portion of the earnings that would go in their entirety to owners -- if they all just stayed in their rocking chairs -- is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all the losses -- and large fixed fees to boot -- when the Helpers are dumb or unlucky (or occasionally crooked).”
So how do you accomplish all of these things?
The easiest way to do it is to invest in an index fund. You can think of an index fund as a group of stocks that mimic the performance of an index, like the S&P500. An investment of $1,000 in an S&P500 index fund would theoretically be the same as investing in all 500 companies that make up the index in proportion to their market value.
Index funds are naturally diverse and have relatively low expense ratios because fund managers of index funds can’t justify high management fees since they’re not actually picking what stocks go into the fund - it’s already determined by the index.
What does Warren Buffet say?
“I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.”
“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money... The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns… You'll pay lots of fees to people who do well, and lots of fees to people who do not do so well."
In 2009, I only invested in four things in my Zecco.com and 401(k) account throughout the year:
I wasn’t expecting any homeruns in terms of returns and I didn’t get any. But I was pleasantly surprised.
In my Zecco.com account, I held the two ETF’s and had a return* of +25%.
In my 401(k), I held the two Vanguard funds and had a return* of +29%.
So what am I hoping that you get out of this article?
This article was featured in the Carnival of Personal Finance hosted by Get Rich Slowly. Please check out this carnival for many other great articles about personal finance.
3 Reasons Why the Average Joe is a Bad Investor
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The average person is an emotional investor
The average person buys MSFT because they love Xbox
The average person gives his money away in fees
Alright, let’s recap:
So… what’s an average person to do?
How Much I made as an Index Fund Investor Made in 2009
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29 comments:
Excellent post!
I've invested in a few ETFS back in November and the returns have been fantastic. Wish I bought more, but then again, we can't complain when we see an unrealized gain in the portfolio.
Btw, I believe I'm an "average" driver, but does this mean I'm actually below-average? I really dislike driving but I'm left with no choice. I think practice does some good but sometimes it just a natural instinct. Why can't trains be more efficient and be more cost effective like other countries in Europe? What does Warren Buffett have to say about that? To be honest, don't think I've riden on a train in US except for the LIRR. -__-
@Christine
That's funny that you mentioned Buffet and trains. Didn't he just buy all of Burlington Northern Santa Fe Railway in 2009? Haha.
To be fair Mike, if you put your money in those funds starting in 1999 your total return would be MUCH MUCH MUCH lower.
That being said I agree with everything you said LOL
@Evan
Haha, thanks for putting that disclaimer out there for everyone. I hope no body thinks that getting a +25% return every year for index investing is a sure thing - it's not; far from it.
Mike-
What is Warren Buffet but a professional hedge fund manager that draws a huge portion of firm assets as a salary to Berkshire Hathaway?
I agree with the idea of buying to hold, but for me its the fun of the market to hold it to make a $70 profit minus commissions of whatever, so I made $50- but its the fun for me not my serious investments.
The reason why I choose to go with Mutual Funds is because its much easier for me. One of the funds that I am in is called a "Thermostat Fund," which basically does the opposite of the market, when the market is doing well, I have a lot of debt securities, when I have a lot of equity, it means the market's doing pretty poorly.
1. I can't buy enough of a diverse portfolio by myself. Sure my net liquidatable savings is probably in the $40,000 range. But to have that realisitically across 25 stocks at $10 a trade... I mean, I guess the idea is that then I'll hold it but how much of any one stock can I diversify with?
2. You can't legitimately buy debt securities as an individual investor. (I mean... you can... I don't mean NOT legitimate as in legal, I mean as in practicality.)
3. You can't legitimately buy foreign stocks as an individual investor. Of course there are ways around that with an ADR, some brokers do allow you to invest in China, or you can invest in a multinational like McDonald's but that all seems a lot of work to pay someone 2% of my money.
4. Let's say that the brokerage and I have equivalent earning each year, yes I've lost .95%... (that's my expense ratio on earnings for my IRA... I think). $10,000 over 30 years at 9% is 132,676.78, at 8.05% its 102,033.58. I'm not saying that $30,000 is nothing. It's definitely not but can I legitimately contend that I'll make 9% over the long term by guessing right now and holding it?- I don't trust myself enough. I know, I hear about how professional money managers don't really know any better. I don't think they do either but they make me not have to worry about it... Which is worth it to me right now.
Also... definitely... definitely a below average driver. Not that I'd admit that to my insurance company. But you know.
@Anonymous
Great points - The Thermostat Fund is a really interesting mutual fund - would you mind talking about why someone might be interested in investing in more debt securities during boom markets and more equity securities when markets are falling? It's counter intuitive and I'm sure a lot of people are curious.
To address your other points:
You can easily invest bonds directly from the US treasury (http://www.treasurydirect.gov/) or invest in a bond proxy (bond index) through your brokerage account.
I'm not sure what the point you were trying to make with your statement on foreign stocks but keep in mind that a lot of foreign companies list directly on American stock exchanges. ADR's a really effective way to invest in foreign companies - I'm a fan of them. As a matter of fact, a lot of the foreign exposure from mutual funds are investments through ADRs.
To your last point, one of the reasons why I like index funds so much is exactly because I don't have to worry about them: they have low transaction costs and they're well diversified. If you don't believe that a professional money manager can outperform the market, I don't understand why you would pay larger fees to them when you have the alternative of investing in an index fund which traditionally has lower fees.
This is a really, really excellent article. I AM that average person stuffing money under my mattress/in a savings account and/or investing in CDs. I'd been wondering if there was a somewhat more profitable way to invest money where there wasn't a huge risk. I think I'm going to take a look at index funds.
Thank you very much!
@anthy
Yes! You have no idea how happy you made me when you commented that you were going to take a look at index funds.
Good luck!
Nice post Mike.
Couldn't agree with you more. I've lost a few thousand chasing high returns and "exciting" funds.
Switched to indexes because:
1. Low maintainenance
2. Low expense ratios
3. Easy way to diversify (as a young investor, you may not have a lot of cash to build a diversified portfolio)
@Lazy Ron
Thanks so much for sharing your comment!! I'm really excited because it's one thing for me to write about why I think index funds are great but it's so nice to hear someone who has come to a similar conclusion because of their own experiences.
Just to add on to what you just said, there are only a few things that most people should seek to do:
1. keep costs low
2. diversify
3. take a hands-off approach to investing
It just happens that these three things will lead you to an index fund.
Thanks again, Lazy Ron.
Index funds are not great. And, like the typical (i.e. non-experienced) investor which most people are, they make bad choices when it comes to investing, which fits very well with the title of this post.
Why are index funds bad?
1. You are guaranteed not to beat the market/index average. Some people would say "no sweat, that's fine, it is well documented that most professionals don't beat the averages either". The problem is that there is no thought or analysis, you are just throwing your hands up and saying "I don't care, just give me whatever the market does", and that's not investing, that's on par with (though not entirely the same as) gambling - you have no control.
2. Index funds are too diversified in modelling the market/index. You get the entire spectrum of good, bad, and ugly companies/stock in the index and again, absolutely no analysis as to whether the company is a good investment. The company could be knocking on the door of bankruptcy or be wildly overvalued, but the index fund may (have to) take it simply because it helps the fund attain the objective of modelling the market/index it's tracking.
3. People have long said that because the markets go up long term, index funds likewise go up long term. The only problem here is that it does not allow for the possibility that markets will be in a prolonged downturn, or what happens to index funds during a downturn.
A few years ago, one of our family friends read "a book" and got religious about index funds. It was great - just put your money in, month in and out, and you're going to make money - and it's going to compound and do better than risk free interest rates you'd get at the bank or a money market fund. I knew that we were once again upon the peak of a bubble.
Up until then, Bogle and all the others could make their justifications because it made sense - as we were in a prolonged bull market. My personal feeling is that index funds, along with the government and others caused this upward spiral that fed upon itself and as long as money was continually funneled into the market. Remember Bush - here, use a Health Spending Account...and put your money in the market. We're going to let people take a portion of their Social Security payments and...invest it in the market. Here - 529 college savings plans - which you buy mutual funds investing in the market. The list goes on and on. So, the market goes up, more people put their money into index funds, so the funds have to buy more of the stocks that comprise the index, thus continuing to push the market higher ... and the upward spiral continues.
The devil in the details here, is again the assumption that there is continued demand to invest and money continues flowing in to the market. However, what happens when the market drops? Will Average Joe, who now calls himself an investor have a finger on the trigger just waiting to bail out if he sees his account balance down 10%? 15%? Well, with hindsight, we all now see what happens - everything works exactly the same in reverse. Average Joe bails, the index funds are forced to sell shares to make redemptions, and the selling of the shares forces the market down, then others with even high risk tolerance who may be ok until a 20% loss start bailing - and now a downward spiral goes in motion.
Again, index funds are for people who shouldn't be in the market to begin with. If you are going to invest, really do it - learn about investing, where you are putting your money, find good strong companies with good prospects and invest in them directly over the long-term with Zecco, Sharebuilder, or sign up for a dividend reinvestment plan or direct stock purchase plan. That is what Buffett would tell you - not to just throw your money at index funds and forget about it.
"It wasn’t the +100% return I was hoping for but I was pretty happy earning +25% on my money last year in what I felt to be a very low risk investment."
And so you "earned" 25% last year. Did you sell and lock in your 25% profit, or you just sitting back in your rocking chair...now down 5% to 10% from there? Did you pay taxes on the 25% you "earned"? If not, then you haven't earned anything yet. Additionally, a 25% return for last year is actually not very good at all - that's well below all the averages. Look at the line up of T. Rowe Price mutual funds over the past year - they were mostly up 40% and more. So, you didn't pay 2% mutual fund expenses - happy that you only got 25% compared to 40% or 60% for saving the 2%?
http://individual.troweprice.com/public/Retail/Mutual-Funds/Historical-Performance
Out of their domestic funds, only one fund (a Retirement Target fund at 24.55%) had less than 25% return over the past year - everything was up significantly more than that. Look at their International funds and they were up two, three, four times and more than your 25%. And those domestic TRP funds - fees were generally in the 0.75% to 1% range, but regardless 25% is lower than every last one of those domestic funds (except the one).
One year, especially the past year is an aberration and nothing more. If you got "only" 25% last year, while the population of traditional mutual funds (with their "high" fees of up to 2%) trounced that return, I wouldn't be overly joyed about that kind of performance. Further, I don't think it was something to point to as justification that index funds and/or ETFs are superior to traditional mutual funds.
@Howard
Whoa there, buddy.
First of all, there's not a single place in this article that says that mutual funds are bad or that index funds are better than mutual funds.
Second, if you actually read the article, you would see that I advocated buying mutual funds with low expense ratios and with no-load, which is basically what you just showed me in that link. So I don't understand where all the contention is coming from.
As a matter of fact, there are a lot of mutual funds that are index mutual funds.
Third, you said "one year, especially the past year is an aberration and nothing more."
Agreed. Which is why you shouldn't point to the one year performance of T. Rowe's mutual funds as a reason why they're better than index funds and why I shouldn't be happy with my 25% return.
Following your logic, I could point to Ford (F), which was up over 200% in 2009, and then say "this is why all funds are bad and everyone should have invested in Ford".
It doesn't make any sense.
Fourth, not once did I mention my 25% return as a justification why ETF's are better than mutual funds.
Lastly, you said that when markets fall, the average investor bails - which is bad. That'st the first point that I made! With that logic, you shouldn't even be investing in the stock market.
You say, that "index funds are for people who shouldn't be in the market to begin with". Look, you're obviously someone who knows something about investing. Most people don't and don't care. They don't find investing sexy. They don't want to look at financial statements and learn about stocks.
Thanks for commenting, Howard.
"Great points - The Thermostat Fund is a really interesting mutual fund - would you mind talking about why someone might be interested in investing in more debt securities during boom markets and more equity securities when markets are falling? It's counter intuitive and I'm sure a lot of people are curious."
Of course it's counter intuitive - that's why it's called contrarian investing, and most times it works better. You don't follow the herd. As Buffett would tell you - buy when there's blood in the streets, and sell when everyone is giddy.
You invest in debt when the market is up because you're going to eventually get a fall/crash. To correct it, interest rates will be lowered, and when that happens, bonds/debt soars.
Invest more in equities when the market is falling - well obviously, someone was buying when the stock was higher - no? If you've done your homework and a stock was a good buy when it was higher, the fact that it's lower should make you happy that you can buy more at a bargain price.
"They don't find investing sexy. They don't want to look at financial statements and learn about stocks."
Yes, and people wonder how Bernie Madoff or Stanford can do what they did. Thanks for making it very clear.
@Howard
"If you are going to invest, really do it - learn about investing, where you are putting your money, find good strong companies with good prospects and invest in them directly over the long-term with Zecco, Sharebuilder, or sign up for a dividend reinvestment plan or direct stock purchase plan. That is what Buffett would tell you - not to just throw your money at index funds and forget about it."
No, I'm pretty sure Buffet said that 99% of the population should throw your money at index funds and forget about it.
Here's the quote: "I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs."
And here's the video where he actually says it:
http://www.youtube.com/watch?v=P-PobeU4Ox0&feature=player_embedded
But who knows? Maybe it's not actually him.
I've read past Buffett books, and though he may have said that now, it is a significant change of color for him. Similar to Malkiel in newer editions of A Random Walk Down Wall Street - he likewise tells people to buy index funds though such a suggestion conflicts with past historical positions.
These people, who have flip-flopped in their thinking, or just the public voicing of their suggestions, lose credibility when they do that - yes, even the teflon-coated Buffett. No different than George W. Bush - during his first term, you would see pictures of him out running to stay in shape and for the sport of it, there were articles in running magazines, he ran some pretty well-known distance races in very good times. Then, later, he essentially condemned running saying how it was so terrible for your knees, and he didn't understand how anyone could do it.
It's called hypocrisy. There are other examples of Buffett being guilty of it.
As for your suggestion of teaching people how to invest safely, go and read some of Buffett's past writings, Benjamin Graham, and others who are noted investors. Your thinking that because you are "investing" in index funds and ETFs is "safe" is fooling yourself. Were you holding these funds and ETFs prior to last year when the markets tanked? Or are you a short-term investor in them at this point? Doesn't Buffett tell you that you purchase a stock/company forever, never selling? How would that play out with your funds and ETFs over the longer term? Go back and look at the lifetime performance of those T. Rowe Price mutual funds I referenced previously. Over the lifetime, the return is pathetic - nearly all of them well under 5% compounded annual return, even with the incredible performance of last year. Can you believe that? Long-term performance over 10, 20 or more years of significantly less than 5%? Why be in the market taking any risk of that's what you have to look forward to? Had your index funds and ETFs existed for any significantly long period of time, you'd find the same type of performance numbers. So, how "safe" are index funds and ETFs? At what point do you sell your index funds and ETFs? You seemed to have neglected that in this post as far as why Average Joe is a bad investor. Average Joe is a bad investor because he trades/gambles (as you've indicated in your own prior experience) as opposed to investing. Average Joe buys at the wrong time and sells at the wrong time - because he doesn't know any better and is not an investor. If he were an investor, he would go and review the financial statements of companies on his own, read SEC filings, and understand what he is putting his money into.
You say people don't want to look at financial statements and do the legwork. I cannot understand why anyone would throw their hard-earned money at anything they did not learn about or investigate. Can you?
You are working off of an extremely short timeline/history.
"Third, you said "one year, especially the past year is an aberration and nothing more."
Agreed. Which is why you shouldn't point to the one year performance of T. Rowe's mutual funds as a reason why they're better than index funds and why I shouldn't be happy with my 25% return.
Following your logic, I could point to Ford (F), which was up over 200% in 2009, and then say "this is why all funds are bad and everyone should have invested in Ford".
It doesn't make any sense."
You (first) pointed to the one year performance of your index fund for reasoning of why you were happy with your "low risk" investment. I countered that the one year performance of the entire product line of mutual funds handily beat your 25% for one year. How does that not make any sense? You put up one year performance, I countered with one year performance.
Your Ford example is what doesn't make sense. Anyone who has taken a basic logic theory class knows that you cannot prove something with a single example which exactly what you've just attempted.
"Fourth, not once did I mention my 25% return as a justification why ETF's are better than mutual funds."
No, the point was that investing in most any equity-based mutual fund last year would have gotten you higher returns (sometimes significantly higher) even when adding the fees and with no more risk.
"Lastly, you said that when markets fall, the average investor bails - which is bad. That'st the first point that I made! With that logic, you shouldn't even be investing in the stock market."
That's absolutely correct - the average "investor" should not be "investing" in the market, because he is not an investor. We seem to have a significant difference of opinion of what the definition of "investor" is. You seem to think it means that simply by virtue of the fact you buy a stock, an ETF, or buy and fund that makes you an investor. I put most of those people in the category of "gambler".
Hey Howard,
Great to hear from you.
I disagree when you say I am working off of an extremely short time-line or history. One of the reasons why there are so many advocates of index funds are that they are well diversified and by definition track the market. If we look at the historical performance of the past 30 years
both the Dow Jones Industrial Average and S&P500, returned, on average, about 10%.
Does that mean someone who buys the S&P500 Index Fund (SPY) should expect 10% if they invest in it this year? No, I can guarantee you it won't return 10%. It might return 2%, -10%, or 30% but on average it will return somewhere closer to 10%.
History is not necessarily indicative of the future but it's empirical evidence and the most reliable thing that we have to work with.
One thing that I notice that you keep on referring to is why someone who doesn't know anything about investing should be putting any money in the stock market anyway. Well, it's obvious - they want to make money. And on average, index funds have returned 10% which is a lot better than any fixed income products (CD's, savings accounts, government bonds) that are readily available to most people.
I think we'll both agree that researching individual companies takes a lot of time. Most people don't have that time and if they do, they don't want to do it. Believe it or not, some people find poring over financial statements boring and would rather drink a bottle a cyanide. So what should these people (average investors) do? Invest in an index fund. It doesn't require a lot of research, is well diversified (read: low risk), and provides an average return that is higher than the fixed income products that they would have invested in otherwise.
To address the points in your most recent comment:
I only pointed to Ford to illustrate why your argument that mutual funds are better than index funds (not mutually exclusive, by the way) was flawed for the same reason you said: "you cannot prove something with a single example."
I brought up the return of the funds that I owned in 2009 and my happiness because it was a fact. I earned 25% on my money last year. What's wrong with that statement? I am not telling anyone that they should expect a 25% every year by investing in index funds. I bet it's the happiness part.
Also, you said that "investing in most any equity-based mutual fund last year would have gotten [me] higher returns". Uh... any equity-based mutual fund like.... the equity-based funds that I invested in?
Vanguard Target Retirement 2050 (90% equity mutual fund)
Vanguard Small Cap Value Index (100% equity mutual fund
Dow Jones Index Exchange Traded Fund (100% equity index fund)
S&P 500 Index Exchange Traded Fund (100% equity index fund)
Regarding your statement about "investors" and "gamblers", I'm not going to waste my time arguing semantics with you.
Thanks for commenting!
"Also, you said that "investing in most any equity-based mutual fund last year would have gotten [me] higher returns". Uh... any equity-based mutual fund like.... the equity-based funds that I invested in?"
When I say "mutual fund" I mean non-index mutual fund, and I believe you are well aware of that. When you say "index fund" you keep saying "but I am in a mutual fund" and you are the one playing with semantics.
Index funds matched or came close to matching market performance last year (as expected). As I've shown you, broad-based non-index equity mutual funds handily beat the averages.
@Howard
Hey Howard,
Thanks for the insight but I'm sorry - No, I wasn't aware that you meant a non-index mutual fund when you say "mutual fund." We are just talking through messages in comments, after all.
I'm assuming that by "broad-based non-index equity mutual fund", you mean a mutual fund where the fund manager buys and sells stocks as he sees fit.
I absolutely agree with you that index funds match the market return but I don't think you have shown me that actively managed mutual funds beat index funds on average.
Here's an excerpt from Wikipedia:
"Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992."
There are references to the sources here:
http://en.wikipedia.org/wiki/Mutual_fund#Index_funds_versus_active_management
I would like to emphasize the part, "mutual funds do not beat the market and actively managed mutual funds under-perform [the market]."
"I absolutely agree with you that index funds match the market return but I don't think you have shown me that actively managed mutual funds beat index funds on average."
But they did last year.
I already gave you the link to T. Rowe Price's funds 1 year performance.
Fidelity:
http://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsr
Vanguard:
https://personal.vanguard.com/us/funds/vanguard/all?sort=type&sortorder=asc - on the left click the checkbox for Stocks under Asset class
Most all of these funds trounced the 25% of your index fund.
Need more evidence that index funds did poorly in comparison to all of these managed NON-INDEX mutual funds? I just gave you a list of about 100 funds across three of the biggest mutual fund companies - how many did you see that had below 25% for 1 year performance?
@Howard
You just linked me to a bunch of mutual funds. About half are index funds.
@Howard
There's empirical evidence that actively managed funds don't outperform index funds.
Google it.
If you don't agree with that, that's fine.
You're linking to me to some mutual funds. I'm sending you to evidence that actively managed funds don't beat index funds.
There's no new information coming out of this thread.
Mike,
I won't get all "Howard" on you, but why so much duplication with DIA and SPY? Why not get some international exposure?
@Anonymous
Haha - I'm really glad @Howard shared his thoughts because it made for a really good discussion.
That's a good point about the stock overlap in DIA and SPY and a great question.
I treat them the same in terms of my asset allocation - large domestic US stocks. Here's why I have both:
From what I understand, there are diminishing returns when it comes to diversification and the substantial majority of benefits from diversification come from the first 22 stocks, which is why I started out with DIA.
http://en.wikipedia.org/wiki/Diversification_(finance)#A_chart_comparing_diversification_to_risk_protection
Then, I noticed that SPY's expense ratio was slightly smaller (.09% vs .17%). Nominal difference - so next time around I bought SPY.
On your point about international exposure (great point, by the way), I've been thinking a lot about that myself. I'm still trying to get comfortable with international equities and the reason why I don't have any international exposure is just because I don't understand international markets that well.
I'll look into it more though, thanks!
Apparently, I'm not the only one who believes that index funds are bad.
https://www.networthiq.com/people/benjaminbunny829/tips/why-owning-index-funds-is-settling-for-less
http://www.amazon.com/Margin-Safety-Risk-Averse-Strategies-Thoughtful/dp/0887305105/ref=sr_1_1?ie=UTF8&s=books&qid=1266678011&sr=8-1
@Howard
Hey, thanks for sending me those links.
I really want to understand your point of view a littel bit better so I just picked up that book from Amazon and will report back to you.
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