Why Mutual Funds are better than Index Funds

[Peter666]

First, I don't think you have read all the posts. Second I have provided examples of mutual funds that have soundly beat their respective index over a reasonable period of time. Third, Berkshire Hathaway despite its anchor has continued to cream the market, especially when the market turns ugly.

I agree that a smart investor will develop their own portfolio to beat the indexes, mutual funds and Berkshire Hathaway. But if you have invested in the major indexes like the S&P 500 (not the specialty ones discussed in a different post) thinking they are better than the two alternatives, you are an incompetent investor.

[DesertCat]

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First, I don't think you have read all the posts. Second I have provided examples of mutual funds that have soundly beat their respective index over a reasonable period of time. Third, Berkshire Hathaway despite its anchor has continued to cream the market, especially when the market turns ugly.

I agree that a smart investor will develop their own portfolio to beat the indexes, mutual funds and Berkshire Hathaway. But if you have invested in the major indexes like the S&P 500 (not the specialty ones discussed in a different post) thinking they are better than the two alternatives, you are an incompetent investor.

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I have read all the posts, amd you have provided only ONE example of a fund that's beaten an index. Whether that fund is well run or just lucky, it's probably not going to beat the indexes in the future over long periods of time.

I described for you in general the handicaps mutual funds have. There are many, many very skilled, very good investors running mutual funds. And 95% of them will trail index funds over long periods of time. It's mainly because of the poor structure aand high costs of mutual funds. In fact, most mutual funds beat the indexes, BEFORE FEES. It's mainly the high fees that cause actively managed funds to trail index funds.

And to repeat. Berkshire Hathaway is NOT a mutual fund. It has no annual fees. It can invest where-ever Buffett wants in what-ever he chooses. That's exactly why it has outperformed. If it was a mutual fund, he would be hard pressed to beat indexes as well.

And lastly, the vast majority of people are "incompetent investors". That's okay, most people spend their time becoming good at something else, usually their careers. They simply don't have the time, education, and patience to invest successfully in the stock market. That's why Warren Buffett recommends they buy index funds.

You seem to think you understand investing well, but you don't understand the basic handicaps your managed fund manager will be suffering from. I think that makes you a good candidate for an index fund.

[BadBoyBenny]

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Secondly, there are still the remaining 20% that outperform the market with proven track records and excellent managers at their helm.

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I thought only 20% outperform the indexes in a given year. Only a couple have done it for over a decade or so. These also tend to be the funds with higher variance than the indexes, not steadier gains (generally because they have more concentrated portfolos). Bill Miller's teams in the 90's or Peter Lynch's in the 80's come to mind. But as their assets grow, their chances of beating the market are likely to diminish. Index Funds are and should remain the safest way to get the best return for the least work for any equity investor.

[wildwood]

Not to split hairs here, but an index fund is just a mutual fund based on an index. If someone is considering a fund, why wouldn't you want to look at the entire universe of funds? It doesn't seem to me than you gain anything by limiting your options. fwiw

[TN_POKER_MAN]

The S&P 500 Index is so top heavy. I don't know the exact figures, but I seem to recall something in the neighborhood of 80% of the index return is dictated by the performance of less than 20% of its holdings.

S&P 500 index funds have underperformed over the past few years because of the lackluster performance of the HUGE stocks out there (Pfizer, AIG, MSFT, WMT, etc.)

In reality, the S&P 500 is not really all that diversified. And contrary to what many feel, index funds are actively managed (who do you think decides on which stocks make the list?).

If you are looking for a Large (mega)cap fund, it's decent, but if you want a diversified portfolio the S&P 500 fund is hardly enough.

[DesertCat]

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The S&P 500 Index is so top heavy. I don't know the exact figures, but I seem to recall something in the neighborhood of 80% of the index return is dictated by the performance of less than 20% of its holdings.

S&P 500 index funds have underperformed over the past few years because of the lackluster performance of the HUGE stocks out there (Pfizer, AIG, MSFT, WMT, etc.)

In reality, the S&P 500 is not really all that diversified. And contrary to what many feel, index funds are actively managed (who do you think decides on which stocks make the list?).

If you are looking for a Large (mega)cap fund, it's decent, but if you want a diversified portfolio the S&P 500 fund is hardly enough.

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Wow. That's a lot of misinformation in a single post. First, you are right that the S&P 500 isn't the best possible index, it's focused on the largest cap stocks. A russell 2000 fund would be better since it exposes you to the broader market.

But index funds aren't actively managed. The indexes are picked on a regular basis (russell is yearly) based on current market caps and liquidity. Berkshire isn't in the S&P 500 because it's relatively illiquid, for example. But the criteria are pretty mechanical.

Managers of index funds do try clever techniques using their cash to earn extra interest to help outperform slightly, but those moves only have a tiny affect. The key is that because their expense ratios are so low (.2-.3%) they tend to match the index results very closely.

And if you think 500 stocks isn't diversified, you and I have entirely different definitions of the word. Certainly it's not "perfectly" diversified, but it's far more diversifed than any actively managed fund I've heard of.

Think about it. An actively managed fund might have 100-200 stocks, and if the fund is large enough, might only be able to buy S&P 500 stocks anyways. So you end up paying the manager 2% a year to churn money around the same universe of stocks.

[TN_POKER_MAN]

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So you end up paying the manager 2% a year to churn money around the same universe of stocks.

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no i don't. There are plenty of good mutual fund managers out there that beat the index (even on a net cost basis). I'm sorry, but its about value and not cost.

[meow_meow]

I'd like to ask OP a question:
What attracts you to post on the 2+2 forums?

After your posts in this thread got a bit strange, I browsed your other posts - no poker content whatsoever.

BTW, my personal favorite is the one where you suggest that homosexuality (or "men boning each other in the bum" as you put it) threatens the continued existance of the species.

So I guess I'm outing you as homophobic, mutual fund-loving, non-poker discussing Canadian.
Ha. I didn't think we had any of those up here...

[Peter666]

Hi Meow Meow,

I have a cat by the same name. I play Black Jack semi- professionaly and have been vociferously reading Poker books for the last four months. I haven't posted anything about poker yet because I don't have anything worthwhile to say, and all my questions are addressed in old posts.

I'm pissed because of the new gay marriage laws in Canada and the cultural acceptance of a man's hairy anus as a sexually accepted organ. So while the politicians are earning a living legislating this crap, a normal family man has to continue being a wage slave, paying 50% or more in taxes, which makes it unfeasible to have children at a young age, which I want to do. So there.

I don't really love mutual funds, but anything that makes me money while I do next to nothing is a God-send.

[meow_meow]

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I'm pissed because of the new gay marriage laws in Canada and the cultural acceptance of a man's hairy anus as a sexually accepted organ. So while the politicians are earning a living legislating this crap, a normal family man has to continue being a wage slave, paying 50% or more in taxes, which makes it unfeasible to have children at a young age, which I want to do. So there.


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I'm sorry, how is gay marriage connected to your wage slavery again? I must be a bit obtuse.

I can never understand why some heterosexual men fear/loathe gay men, when they should be happy with the reduced competition for heterosexual women.
Wait, I do understand, it's simple, irrational human xenophobia.