« Making the switch | Main | Anticipating the new model OS's »
November 03, 2003
Fooey on mutual funds
I became a Very Engaged Investor in June 1999 when I sold my ISP. I started on a traditional route, meeting with a professional investor (Solomon Smith Barney, I think). Shortly after, I read The Motley Fool Investment Guide (and several other books from the Fool and other authors), and began my education as an Individual Investor (I didn't end up using a professional investment manager, in part due to The Fool).
One of the most interesting discoveries I found was that professional managers don't seem to do better than the market very frequently. In fact, I got the distinct impression (and a few authors said as much) that the primary purpose of the professional investment industry is self-preservation (watch CNBC for an afternoon or so with that in mind and see what you think). The Fool advocates that an individual investor (apparently with a lot of time) can do as well as professional managers. I tried this for a couple of years, with mixed results. It's a lot of work, and I just don't have that kind of time.
Earlier this year, I came across Rational Investing in Irrational Times. This book delves at length into the tricks that mutual fund managers use to make their funds look like they are performing better than they actually are, and again, how professional managers rarely out-perform the market. It also addresses the many foibles investors commit that undermine the investment performance they could otherwise achieve. The vehement recommendation of the author is to stick to index funds (not surprising, since he is a researcher for one of the major index fund companies). But it's hard to dispute (or disbelieve) the facts he presents to back his position (and they are even more credible to someone who has experience as an investor).
That was just so much information to factor then. Apparently Mr. Swedroe wasn't the only one who was noticing these inconsistencies. The Mutual Fund Industry has come under intense scrutiny recently by Congress, and not ended up looking good.
In March I began investing strickly in index funds, and I plan to use that strategy indefinitely (index funds have the benefit that they are the market--they represent what professional managers are always trying to out-perform, and rarely do). Here's the balanced, diversified portfolio I plan to use for at least the next 10-15 years (rebalancing annually):
Hypothetically, some people, some of the time, could outperform the market using any number of hypothetical investment strategies (or professional managers using those same hypothetical strategies). I'm more interested in real results, and am confident that 90+% of the time, my simple strategy will outperform those hypothetical strategies.
Posted by pete at November 3, 2003 11:07 AM
Trackback Pings
TrackBack URL for this entry: