Are Mutual Funds Worth It?

Not to mention the 500 transactions needed as you continue to save or draw down.

-Will

william dot trice at ngc dot com

At one time I found it complicated to work with DRIPs at tax time. In recent years, however, my companies do the calculations, and I just turn over a slip that comes in the mail to my tax preparer. If you are able to do your own taxes, the DRIP part still should be easy, at least in the case of my particular companies.

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.

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

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

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

And you can't win the lottery if you don't buy a ticket. The question is, is the work likely to be of any benefit? And will the benefit be enough to compensate for the work?

You can get average with almost no work.

Brian

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.

A capital gain distribution no more "complicates" the basis of a mutual fund than an ordinary dividend "complicates" the basis of an individual stock.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Years ago a major fund got a new manager, who liquidated all existing positions. I'm not kidding. December 28th, holders got a surprise: more than 35% distribution, over 68% of which was short-term. That put a few "complications" into a lot of people's tax planning. It probably made more than a few wish they hadn't signed on for automatic reinvestment, too. The following year, that manager 'departed the firm to pursue other career interests' (or something like that). The predictability of funds is only partial, long, short, divs, or interest.

Compare to Mobil Oil (now XOM), arguably a "buy with your eyes closed household name", purchased in 1985. At a closing price Friday of $78.04, the annualized appreciation is 11.66%, current yield on cost is 26.32%. (I'm just *sure* someone will say, "Well, Buffett got 35%" or find some other objection :-) I'm sure there are many other similar stocks individuals "wisely" bought, or are now buying.

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.

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

957779? They itemize previous booms in Japan, Latin America, east Europewhich had comparable causes and downfalls to the current cycle. Evento me, when working 60 hour weeks on stuff other than finance, thesetrends were achingly obvious things to join up with, which I did aswell as bailing out before too late. You could do well by reading all8 sections of their " special report on the future of finance" (andrecent past) which are clickable on the right hand column. They seemto offer free, even though I have paid a small fortune across thedecades 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.

Mr. Dumbs: This is your opinion. I agree with Elizabeth's definition of investment success.

The only reason I respond consistently to your posts is to contrast the view of a get-rich-quick, risk-taking, timing type with those who know that slow-and-easy wins the race.

Live within your means. Save regularly. Invest in broad, low cost index funds, diversified so as to include high grade bonds and/or CDs. Too many blew off the high grade bonds/CDs in recent years. The reason I am sleeping well these days is because of my bonds/CDs allocation.

You imply it is easy to beat the market in the long run. All reputable research on this indicates the opposite.

Defeatist approach? We're retired. I'm 63, my husband will be 54 in a couple of weeks. I invested so we'd have enough. I have other things to do with my life. Oh - and no gold-plated wheelchair for me. I walk some 40 miles a week - 9 miles yesterday in 2:10, a half marathon a week ago in a little over 3 hours beating my 23 year old granddaughter who ran.

Elizabeth Richardson

Interesting. May I suggest that perhaps what we are looking at here is a gradient of "investing"?

From I ain't got no money! Jobs and savings accounts to T-Bills and bonds with time the principal horizon to mixes of Treasuries with index funds to mixes with stock funds to funds and maybe some companies' stock to one's own portfolio to super managed money (whatever that is) to opening up one's own hedge fund to giving it all the Bernie Madoff (which brings us full circle)

To what we all do from time to time - speculating on what life is all about?

"The goal"? The only goal? Maybe for you, but you ain't everybody. Some people are lucky enough to like their work.

I tell my daughters that money is freedom. Yes, freedom to retire if you want. But also freedom to travel, freedom to live where you want, freedom from many worries, freedom to take time off to care for a relative...

-- Doug

You're right, of course. What I really meant is that the automatic reinvestment of capital gains distributions that often occurs when investing in funds complicates the tracking of the basis of individual shares of the fund that are owned. Is that better wording?

-Will

william dot trice at ngc dot com

No. :-)

Many (most?) brokers will allow free reinvestment of dividends from individual stocks. And heck, back in the investment club hayday, DRIP plans were all the rage. Either way, they'll "complicate" things for individual stocks as much or as little as distributions "complicate" things for mutual funds.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

That's why I specifically noted DRIPs as having a similar complication.

-Will

william dot trice at ngc dot com