cthree

Remember kids, don't drink and post.

SD_S2K

I didn't quite follow the whole post. Very confusing.

Also not sure what mutual/index funds he is referring to. Many perform very well, and have been for 30+ years. If he wants to post evidence I would love to see it.

cthree

It's actually a pretty well known fact that most (% varies depending on who you ask) mutual funds under perform the broader market indexes on any given year.

http://www2.standardandpoors.com/spf/pdf/i...06_SPIVA-pr.pdf

Looking at longer time periods, indices continue to exceed a majority of active funds. Over the
past three years (and five years), the S&P 500 has outperformed 65.7% (72.2%) of large-cap
funds, the S&P MidCap 400 has beaten 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap
600 has outpaced 80.2% (77.7%) of small-cap funds.

The gap has closed recently due to mutual funds ability to invest internationally.

QUIKAG

I've been thinking about this a fair bit lately. Statistically, I think this is fairly accurate

1. In any given day, half the active traders will 'beat' the market and half will not.

2. As mutual funds have expenses, that automatically means 'over time' less than half of mutual funds will beat the market.

Agree or disagree?

cthree

'Statistically' that is true but how it works out in real life may be different. If your fund is returning 15% year over year then the statistic is meaningless because YOUR fund is beating the market and at the end of the day that is all that matters (or maybe it isn't).

If you conclude that earning a rate of return greater than the combined ROR of the largest 500 companies in the US is your goal then most mutual funds aren't going to satisfy your goals. An S&P500 index fund will absolutely not quite meet that goal when you take the management fees into account, you will be ~0.25% short year after year.

Earning a ROR equal to or greater than the S&P500 to me is not any sort of investment plan. The S&P500 is a relative performance benchmark not an investment goal.

If you want your money to double every 10 years then you need an annualized rate of return of 7.2%. If you want it to double every 7 years then you need a ROR of 10.5%, every 5 years 15%, 3 years 26% and so on. A typical money market account will double your money in 15 years at 4.8% ($100,000 invested will be worth $400,000 in 30 years).

My non-retirement goal is to double my money every 3 years and to accomplish this I need to make a 26% annualized ROI which is a tough thing to do. It's one thing to be up 30-40% and all is great but exposure to the market can take that away in an instant (in October 1987 the market lost 25% in a single day). I can't make 26% in mutual funds. To do it I need to expose myself to greater risk.

My retirement account doesn't have such aggressive goals because my tolerance for risk is much lower and my time horizon is much longer. My goal for retirement is a 12% annualized ROR, to double my money every 6 years. It's a goal I could manage with mutual funds but prefer to do with individual stocks when possible. I can invest in only the best companies because I don't have $10B in assets to put to work. Having too much money can be a real problem for mutual funds. There is only so much money you can invest in a company before you own it so you either need to buy a small chunk of a very large number of them or you buy larger chunks of much larger businesses. It's necessary for mutual funds to buy garbage stock just to get their assets into the market. I don't have that constraint. I can cherry pick only the best of the best so choose to do so.

SD_S2K

1. No way. if half the traders were beating the market, there would be a hell of a lot more rich stock brokers, day traders, mom and pop speculators at home. no way. Over time there are more losers than winners.

2. A fund like Vanguard Index 500 (VFINX) has returned 12%+ in its history and has an expense ratio of .18%. If you can beat that over the course of 30 years, well then holy sh*t you are the man, and got lucky many times. You would have also spent a hell of a lot of time in front of the computer researching, praying, and buying/selling. Buying a solid mutual fund takes far less time and then you walk away for a long time.

If I can salt away 30% of my take home pay and make 12% on it over 30 years, I will be more than comfortable in my retirement.

Of course this is just my view, I know many on this forum love to buy stocks, and that is their prerogative. Just not my cup of tea.

cthree

The S&P500 has an annualized rate of return of 7.5% over the past 28 years and it unreasonable to expect the next 28 to be much different. How you get a 12%+ annualized ROI over 30 years from a fund which tracks a 7.5% ROI index is pure voodoo.

On the other hand a portfolio made up of KO, GE, WFC, BA and PG has had an annualized ROI of 12.66% over the same 28 years with NO FEES. You don't need to be "the man" to pick 5 or 6 stable, well managed, quality stocks. There is no science in the sorts of names I picked, I just grabbed 5 companies I knew existed in 1979 so I could get quotes. None of them are known for being exceptional which would require the benefit of hind sight.

GPMike

Add CL to that list and you have some world beating international companies

cthree

Well the list is long and wide and it's not that hard to spot those companies today which will be huge 30 years from now in the event you don't want to pay any attention to your investments at all.

How about some energy stocks, XOM? CXV? SU? Or some utilities stocks, on and on and that doesn't include dividend income.

GPMike

I love SU....I wish I still had it


Hey CThree....we should list the best of breed in each sector (top 2 or 3 companies) and see what kind of returns were to be had from pre-crash 1987- present 2007.

I think this is a good endevour because, I firmly believe that this whole credit thing still needs to play out, which would probably cause some really good stocks to be smoked, as everyone sells everything. I love the idea of swooping in with blood on the street and picking up solid companies on the cheap.