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Index Funds...

EnderJE

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If the index funds don't do better then the market and most funds perform worse the the market over the long term, then why don't more people just choose index funds rather then the other types of funds out there?

Shouldn't the index funds provide a distinct mix and perform just as the market does over the long term?
 
If you don't know how to invest or do proper valuations, investing in a broad index fund is the best way to go if you are a long term investor. This is better then a mutual fund, or going to a local broker. The latter lose money, whereas a broad index fund will over decades gain money, especially if the market is currently undervalued.

The other area to use index funds is a market specific hot future sector.
For example, you KNOW the hot FUTURE sector but not enough who is going to win, then you could by a sector index fund.

Recommended: Drug index sector, Oil index sector.
 
Dirk Howat said:
If you don't know how to invest or do proper valuations, investing in a broad index fund is the best way to go if you are a long term investor. This is better then a mutual fund, or going to a local broker. The latter lose money, whereas a broad index fund will over decades gain money, especially if the market is currently undervalued.

The other area to use index funds is a market specific hot future sector.
For example, you KNOW the hot FUTURE sector but not enough who is going to win, then you could by a sector index fund.

Recommended: Drug index sector, Oil index sector.
But, even if I know a hot future sector, I don't know when the sector won't be hot or when the bubble will burst or whether or not the fund manager of that sector knows it as well.

Given this, then wouldn't the broad index be better over the long term?
 
Drug companies are profitable as a rule and importantly, have the ability to maintain high profit margines through their patents on the drugs they manufacture.

Oil is good in the future because of the growing population verses the finite oil resources. Supply and demand basics. This will be valid until and alternate fuel source is found to replace oil, e.g. natural gas.
 
Dirk Howat said:
Drug companies are profitable as a rule and importantly, have the ability to maintain high profit margines through their patents on the drugs they manufacture.

Oil is good in the future because of the growing population verses the finite oil resources. Supply and demand basics. This will be valid until and alternate fuel source is found to replace oil, e.g. natural gas.
I would agree that drug companies would probably be a better investment in the near future given the amount of baby boomers over the next little while who want to prolong their life.

As for the second, oil is a cyclic product in nature, much like a market.
 
For the drug sector you have to understand its historical prices. Buy low, sell high.

You could analyize 3 secotors and move in and out between them by determining their valuation on historic 5 and 10 year averages.
 
Oil is not cyclical.

There is a finite supply of oil which is getting smaller and smaller as we use it. It is also getter harder to get it, you have to drill deeper.

The automobile, retail, and airline industry is cyclical.
 
BTW, I do not buy index stocks. So I am not an expert on them. But this is how I would start to think about investing in them.
 
Dirk Howat said:
Oil is not cyclical.

There is a finite supply of oil which is getting smaller and smaller as we use it. It is also getter harder to get it, you have to drill deeper.

The automobile, retail, and airline industry is cyclical.
When I say cyclical, I'm refering to how the stocks in BC have been doing for the last little while. It's not a straight gain situation, but a win a few...lose a few...over the last few years.
 
Dirk Howat said:
BTW, I do not buy index stocks. So I am not an expert on them. But this is how I would start to think about investing in them.
I do only because I'm thinking that from a "hands free" approach, this is the most logical. I can't pick the market and most other stock brokers can't either. Hence, should I just try to do as well as the market and use other funds to start other opportunities for increase profitability?

But, I do appreciate your feedback and alternative viewpoint. Its given me something to think about.
 
Stock prices in general in the long run, reflect the intrinsic value of the company.

With index funds, things are more stable.

You actually want to find a very stable and growing company (if you are buying individual stocks) which are currently undervalued. I have 5 of the best and then move in and out based on my financial valuations of their intrinsic value and future earnings forcast which I estimate.
 
Dirk Howat said:
Stock prices in general in the long run, reflect the intrinsic value of the company.

With index funds, things are more stable.

You actually want to find a very stable and growing company (if you are buying individual stocks) which are currently undervalued. I have 5 of the best and then move in and out based on my financial valuations of their intrinsic value and future earnings forcast which I estimate.
True, I could do the "Motley Fool" tactic, but I figure that ownership of a rental property or starting one own's biz would be a better risk rather then the stock market. Hence, the other appeal of index funds.
 
Stockbrokers are salesmmen. Pump and dump. Plus they are too overdiversified to understand the companies they invest in adequately and do not focus on the highest probablilities. Thus, they do poorer then an index fund. They follow the Wall Street herd.
 
there are other issues to consider, the most important of which I see being your investment time frame.

consider that in no 20 year time frame in the past 75 years have small caps not SIGNIFICANTLY beaten large caps. significant being 3 percentage points per year or more. if your investment time frame is 20 years + small caps are where you should allocate most of the $ you want in equities.

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Finally, there is solid evidence that, as a group, small caps tend to outperform large caps. In his book Investment Fables, Professor Aswath Damodaran pulls together research pertaining to various investing strategies. Using data from Gene Fama and Ken French, Damodaran found that smaller stocks earned higher average annual returns than larger stocks of equivalent risk for the period 1927-2001. When comparing the smallest subset of stocks to the largest, the difference is considerable: 20% vs. 11.74% on a value-weighted basis, with an even greater difference on an equally weighted basis.
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This is SIGNIFICANT. even 1% is significant over time.

consider someone investing $100 per month for 30 years.

if you earn 12% compounded annual return, you will end up with $353,000

if you earn 13% compounded annual return, you will end up with $442,000

1% difference annually equals almost $100,000 more. I will let you figure out what happens with 3 or 4% more.

small caps get my vote for youngsters. IMO small cap value investing is the best plan of attack, but if you do not want to take the time to research invididual stocks then the russell index will do. yes i know small caps have outperformed for years but I am talking about a long term investment program, trying to guess the cycles will waste your most valuable asset and that is compounding interest over time. the best time to invest is when you have the money. what do I mean?

reinvest dividends.
 
EnderJE said:
I do only because I'm thinking that from a "hands free" approach, this is the most logical. I can't pick the market and most other stock brokers can't either. Hence, should I just try to do as well as the market and use other funds to start other opportunities for increase profitability?
YES. if you feel you can earn higher than 15% ROE in your own ventures absolutely. and use a small cap index tracking fund for excess funds from operations. I would say invest in R.E. but that is absolutely not a hands off investment :)
 
bran987 said:
YES. if you feel you can earn higher than 15% ROE in your own ventures absolutely. and use a small cap index tracking fund for excess funds from operations. I would say invest in R.E. but that is absolutely not a hands off investment :)
Oh, I'm not saying that RE is a hands off investment. I would liken it to be more hands on then the stock market. But, for some reason, I find it more appealing then the stock market.

Re your comment about small cap funds. But, if the fund manager can't pick them and beat the market over the long term* , then why should I invest in that fund?

* I have no stats on this, just a mantra that I've heard again and again.

BTW, I appreciate your feedback on this matter.
 
EnderJE said:
Oh, I'm not saying that RE is a hands off investment. I would liken it to be more hands on then the stock market. But, for some reason, I find it more appealing then the stock market.

Re your comment about small cap funds. But, if the fund manager can't pick them and beat the market over the long term* , then why should I invest in that fund?

* I have no stats on this, just a mantra that I've heard again and again.

BTW, I appreciate your feedback on this matter.
it is not a fund with an active manager, it is a TRACKING index fund that follows the Russell 2000, an index that tracks 2,000 small cap stocks. therefore the "churn" (excessive buying and selling by managers triggering high commission costs and capital gains taxes) is insignificant, eliminating that waste, and also you don't have to pay for the manager OR marketing, which also significantly affects performance.

Vanguard should have a fund that passively tracks the Russell small cap index. it is basically like buying the S&P 500 index fund but for small cap stocks.
 
I was going to suggest Vanguard as well. If you invest in an index fund for the whole market, you can also "dabble" in what you think will beat it with other small amounts of money or just keep track of a "fake" portfolio and see how you do against the index market. But beware when playing with fake money, it's sometimes a different game than when you risk your own.

Also, like Bran said, the index funds have far less expense ratios than the managed funds and they beat 80 or 85% of all managed funds. (that was the number a few years ago...) So it's not a bad bet to go for them

Here are some things you may want to do if you want the whole market (I also suggest overseas funds btw) then instead of buying one index fund, buy a few of them such as small, mid, and large cap stock funds. Buy the same amount in each fund or their porportionate amount to the whole market, and reevaluate them at the beginning of each year to see their return. If one or two are higher/ or doing better than the others, then either put more money into the lesser/lagging fund (buying low) or sell the higher funds (selling high) to equal the lower amounts ie balance them. Doing it this way you'd be selling high, and buying low. If you're worried about buying and selling at the wrong time, this method would ensure you a consistant buy/sell pattern.
 
I only scanned the posts so I may have missed someone already saying this, but if you're going with index or sector funds vs individual stocks or traditional stock-picker mutual funds, you're probably better off using ETF's (Exchange Traded Funds) like QQQQ (nasdaq-100 index fund) SPY (sp500 index fund) DIA (DJI Index fund) etc. many exchanges and brokerages like merrill now have sector ETF products as well (chip, software, hardware, telecom, oil, and many others). They are basically mutual funds that trade like a stock.

The advantages (at least when i looked at this issue last year)
1) no Cap Gain distribution tax issue (where you get a nice tax bill from the funds distribution of its cap gains)
2) low or no fees, load, overhead
3) can enter and exit intraday as oppossed to only getting end-of-day price (useful in event of emergency or just to refine entry and exit pricing).

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geoboy said:
I only scanned the posts so I may have missed someone already saying this, but if you're going with index or sector funds vs individual stocks or traditional stock-picker mutual funds, you're probably better off using ETF's (Exchange Traded Funds) like QQQQ (nasdaq-100 index fund) SPY (sp500 index fund) DIA (DJI Index fund) etc. many exchanges and brokerages like merrill now have sector ETF products as well (chip, software, hardware, telecom, oil, and many others). They are basically mutual funds that trade like a stock.

The advantages (at least when i looked at this issue last year)
1) no Cap Gain distribution tax issue (where you get a nice tax bill from the funds distribution of its cap gains)
2) low or no fees, load, overhead
3) can enter and exit intraday as oppossed to only getting end-of-day price (useful in event of emergency or just to refine entry and exit pricing).

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and also,

1) the ETF's are marginable , so you can leverage from 2:1 to 4:1 depending on broker and daytrader rules. BIG advantage.
2) you can short them just like a stock, so no need to be lucky enuf to find a contra fund for the index or sector you think is going to decline. Also a BIG plus.

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