Are Mutual Funds Worth It?

Many say that an actively managed mutual fund is not worth it because most do not outperform the market and hence investors are encouraged to invest in index mutual funds.
However, is it a good idea to put your money into an index mutual fund and pay management fees every single year? Why not buy and hold shares through a discount broker? Buying and holding through a discount broker may be cheaper because you only pay brokerage fees once and there are no management fees. The stocks you buy can be purchased in such a way that you replicate an index.
One potential problem with this idea is the lack of diversification you may get. Mutual funds can invest in thousands or companies but investing in thousands of companies through direct stock can be time- consuming. However, is it necessary to hold so many companies? What about the 15-stock diversification rule?
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Most indexes I'm aware have a minimum of 20 stocks and some have hundreds. Lot of work to do it yourself, especially if you ever sell.
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Advantages for an index fund: Transaction costs Diversification Recordkeeping Rebalancing Liquidity Ability to invest a little at a time Effort
Some asset classes are very difficult to build a decent diversified portfolio unless you are investing very very large quantities of money
Disadvantages: Management fees (though at as little as 10bp, that's not much of a criticism) Certain asset classes aren't well covered by decent indices Tax management (ie. tax loss selling - also not much of a criticism, as one may certainly sell off some lots and as long as they are not reinvested in the same index, no problem)
For the vast majority of investors, those advantages outweigh the disadvantages so enormously that it's amazing.
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Most people don't have enough funds to hold a diversified portfolio, nor do they have the time and knowledge to manage their own portfolio of stocks.
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Where can people go to find out which funds and stocks to own? The problem with financial experts is that there are so many of them and past performance isn't a good sign of future performance.
I don't see why people shouldn't take the time to get some knowledge about economics and investing especially when they will end up having several years of income tied up in investments. 25% of the US population has at least a 4 year college degree and they should be able to acquire financial knowledge.
-- Ron
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Personally I use Morningstar. But that's getting advice from financial experts.

I have been investing in the stock market for over 20 years. I have an advanced degree. I have some knowledge of how to evaluation stocks. Yet, I have neither the time nor the knowledge to evaluate a number of stocks to put myself in a diversified portfolio.

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Sure, they can acquire some average amount of financial knowledge. But remember that "stockpicking" is a competitive activity, so any investor is compating with others, including some bright people. So, to make more money than average, by picking stocks, you have to know much more than average.
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wrote:

While I have noticed a correlation between education and income, my experience has been that there is no general correlation between education and good money management skills (budgeting, cash flow management, investing).
-HW "Skip" Weldon Columbia, SC
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On Jan 21, 1:30pm, "HW \"Skip\" Weldon"

Peter Lynch has long been a proponent that a man who can select a refrigerator or a house or a good restaurant, who can decide on a doctor or a diet, can also select and decide on a portfolio of stocks. All that is required is looking at the company's annual reports, and a history of their earnings. Keep it simple, keep it solid. I have experience with my own portfolio as well as with a handful of funds. In all instances, I outperformed my funds, and frankly, accounting for funds is a nightmare.
I'm not promoting anything here - just providing links to a portfolio of ten stocks I slapped together a couple of months ago because they looked like they'd been slapped down, and to an index Tad suggested, for comparison. The dollar amounts were supposed to be 100k but it ot complicated, I got lazy, and the percentages remain constant comparables.
http://www.stockalicious.com/portfolio/4710
http://www.stockalicious.com/portfolio/4745
One big advantage of one's own portfolio I have found is that you decide when to sell or not, and do not have to put up with "surprises" around tax time, "window dressing", short-term gains, high turnover and so forth . It is also much easier to keep track of which companies you own. I will put in a little more work next month and start a simple spreadsheet to keep track of the earnings of the companies. The earnings are the dog that wags the tail (no pun with 'dog' stocks intended).
I would openly invite and welcome any criticism of the portfolio I slapped together. It really is not hard guys. And if I wanted to sell covered calls, I could. I usually wait until the holding period is 12 months.
The one diversified fund I do own was heavily weighted in "Financials" last year, and has lost more than half its value. I did not understand bank reporting, had been told that banks are slow growth, was a little puzzled how banks could grow so quickly, and so I had only a small position in my portfolio. Privately, I thought I was stupid, and was *sure* the fund's research and analysis was *much* better than mine. Ha. Haha. It does not make me feel better to know they were stupider than I.
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And constant vigilance. Just because most folks, with some education and effort, may be capable of managing an adequate portfolio of individual stocks doesn't mean that it's the most effective use of their time or efforts. In fact, for most folks, it's probably nowhere near worth it. Most of us are perfectly capable of baking our own bread, and some of us even make fabulous bread when the mood strikes and time is available. But most of us simply don't have the time nor inclination to bake daily, nor is it even likely to be financially advantageous to to so, either.

Are you kidding? Accounting for a taxable portfolio of individual stocks - unless one pretty much never ever sells anything - is far more complex. And while I'm sure it's possible that you outperformed your funds (I've no idea which funds you have), the vast majority of folks can't even figure out what their performance was, no less be able to reasonably compare it to an index.
Note that I'm not saying you didn't beat your funds or whatever benchmark you feel is appropriate. I am fairly certain, however, that whether you beat them or not, you spent a lot more time on it than most folks are willing to spend. Or need to.

Thanks for the links - I'm looking into Stockalicious for some portfolio analysis now.

You don't normally have much of that in index or index-like funds or ETFs, either. Nor is most of that an issue in an IRA, 401k or other tax-advantaged account, which is probably how most average folks are building their retirement savings, if they are saving at all...

Again, not even remotely reasonable for most folks. Talk to people. Most just don't want to spend the time or even want to know too many details. They just want to set it and forget it. And most folks results would actually be better if they did just that.
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On Jan 23, 12:19pm, snipped-for-privacy@fractious.net wrote:

[snip]
Ah, yes ... better to give up. No opportunity is left in America.
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dapperdobbs wrote:

So everybody, if they study a bit and do a little work, can do better than average?
Brian
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Yes, Brian ... Lake Wobegon where all the women are strong, the men are good looking, and the children are above average. ...
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dapperdobbs wrote:

Yes, of course. It was a serious question though. You can buy a TSM ETF for next to nothing, and be about average for the US market. How likely is it that someone with a bit research is going to do better consistently?
Not to mention, how much work are we really talking about? Mention was made of buying cars or refrigerators. As someone going through the latter, that's a fair piece of work. There're many choices and a lot of information. However, you don't that every quarter or so. If you're lucky every ten years or more.
Brian
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dapperdobbs wrote:

Yes, of course. It was a serious question though. You can buy a TSM ETF for next to nothing, and be about average for the US market. How likely is it that someone with a bit research is going to do better consistently?
Not to mention, how much work are we really talking about? Mention was made of buying cars or refrigerators. As someone going through the latter, that's a fair piece of work. There're many choices and a lot of information. However, you don't that every quarter or so. If you're lucky every ten years or more.
Brian
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Brian,
Since you asked twice, I guess you're serious about getting a reply :-)

Or down with the market. Not completely unlike Elizabeth, I prefer modest plus signs, regardless of benchmarks.

I haven't added up the number of companies in the SP500 that show earnings losses. It stands to reason that consistently profitable companies, purchased at attractive prices, will 'outperform' the average.

Peter Lynch said (I'm pretty sure) that 45 minutes over the weekend would do. But some amount of study is highly recommended, before that.
Again, it is checking the earnings, and doing a little thinking about the prospects and management. Not hard, really. I suggested once, using the Value Line at the library, finding ONE company you really think is a solid buy at very reasonable prices (familiarize yourself with the business and the industry, sniff around), then take 5% out of your index fund, buy that ONE company, and get some experience following it. Once you know somethng about it, it becomes e-a-s-y to know if they're doing well or are beginning to slack off more than you like. E.g. Many years ago Liz Claiborne was a fast-growth company and a hot stock. Then I noticed that they had expanded from women's dresses, to men's clothing, to handbags and accessories (wallets and belts), and I wondered what there was left for them to expand into? I had tripled, the stock chart was near all-time highs, and I decided maybe it was time to sell. I was right.
Warren Buffett however, puts in much more work and has much deeper concentration than I believe I wish to put out, even if I could. I'm not likely to write a book like Ben Graham's, either. That level of output would probably kill me.

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It may stand to reason, but that doesn't make it true.
In particular, the mere fact that a company performs better than average does not mean that its stock will perform better than average.
The reason is that if a company performs better than average for reasons that are apparent in advance, then you're not the only investor who's going to be interested in that company's stock, and your competitors are going to bid up the price. In effect, investors' estimates of the company's future performance are factored into the company's present stock price.
So to find a stock that performs better than average, you have to find a company that performs better than other investors' estimates of its future performance. The companies that do this are often those that most investors think are in bad shape right now -- because it's easier to exceed other people's expectations if those expectations are low in the first place.
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snipped-for-privacy@yahoo.com says...

If someone DOESN'T put forth more effort (including mental effort) than average, then they can forget about generating better results.
The extra effort isn't a guarantee of success, but it is a requirement.
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So you define investment success as doing better than most folks? I define success as having enough to do what I want. That doesn't necessarily mean beating any index/average, it just means making "enough". How much is enough for me, I know, might not be enough for someone else. Yes, I want my money to work hard, but do I want to work hard for that to happen? No. I have other things to do with my life.
Elizabeth Richardson
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wrote:

That would be a completely defeatist approach for most middle income folks, just providing for a gold plated wheelchair in their old age. The goal of investment success is to retire comfortably while young, and no Mz Honda Lioness, not with any spirit of elevated risk or gambling (which I detest). Investment success isn't even needed by the high income because they already have option to cut expenditures and retire early, but the middle income must and can outperform the market to escape the hell of workaday burnout.
Beating the market the last 25 years has been easy and not time consuming in the least. It has nothing to do with beating Wall Street at their own game; few amateurs are in a position to win at this. It also has nothing to do with those Vanguard/Boogle think-small platitudes that I took as gospel so long ago. It's all about being being a rounded, educated, informed person about world affairs and history... something probably very lacking among street smart traders.
Are participants here so tone deaf to have missed past global opportunities such as outlined in the "Relax and enjoy it" heading in http://www.economist.com/specialreports/displaystory.cfm?story_id 957779 ? They itemize previous booms in Japan, Latin America, east Europe which had comparable causes and downfalls to the current cycle. Even to me, when working 60 hour weeks on stuff other than finance, these trends were achingly obvious things to join up with, which I did as well as bailing out before too late. You could do well by reading all 8 sections of their " special report on the future of finance" (and recent past) which are clickable on the right hand column. They seem to offer free, even though I have paid a small fortune across the decades to subscribe :(
However, maybe the future will not allow for such an approach, but If I were to accept the pessimism in this forum, I would have to consider my fairly consistant achievements a mark of talent (which I don't).
Maybe I was lucky catching the 80's Japan boom, due to bailing out before the bust because disliking the rare broker that handled a Japanese mutual fund. I forget what years I noticed a long boom in Italy, when I seethed for not knowing a mutual fund to participate. But on paper I played the entrance and exit well, gained confidence, and abandoned the loser Boogle balanced-index gospel. The 1987 crash went great for me, and on and on admittedly with a few hiccups. Funds and ETF's give great opportunity though because they allow playing these macro trends that are an inherant part of economies and are relatively obvious to observant minds. Granted, the timing of busts are a little trickier to handle, but now easier via standing trailing- loss orders against etfs.
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