Yes, this is essentially my m.o.
Oh, again, what does this …
have to do with this …
…?
My parents weren’t rich and I value putting my money to work instead of having it sit under the mattress. Investing money in a company is also a way to express your values. You could invest in an alternative fuels company or a granola manufatureer. You money would then help that company cultivate new inventions or to be able to expand and hire more people so that they can work and afford to feed their families.
What part of it don’t yopu understand? It’s stated in simple terms.
Now, if you don’t agree with it, that’s your right. Take it to Great Debates if you want to argue about it. But, really, I don’t see what there is that needs explaining.
Well the two aren’t mutually exclusive. Humility and hard work are important but what you described is somewhat of a “working class” attitude towards financial matters. Basically that only hard work has value and only manual labor or industrial should be considered “work”. It’s the same kind of mentality that makes people hide money in burried soup cans.
I don’t think that is a fair statement. Unless someone is willing to devote a lot of time studying investments and maintaining knowledge of the various companies one invests in, most laypeople are better off in index mutual funds (preferably 3-5 low-fee funds, with a minimum of large cap, small cap, and international funds). Investing wisely and maintaining a properly diversified portfolio is a lot of work. A dumb person (one without brains) is someone who thinks they can invest wisely without making the investment in time and financial knowledge beforehand. A wise person (one with brains) will realize their limitation and invest in passively-managed, low-fee funds. Only someone with a keen interest in financial markets, a strong financial background and willing to devote significant time to following his/her portfolio should attempt to direct their own nest eggs.
Just to be clear, I’m not talking playing the market, I’m talking nest eggs (college funds, retirement funds, etc.). Using accumulated savings outside of one’s nest eggs to invest in the market is not dumb, but one should not apply any short term gain one gets on his/her Google investment and think they can match that over 40 years in his/her retirement account.
It seems that you are saying that passive income (such as from stock dividends or bank interest) is bad, and only earned income (from an employer) is good. Bear in mind that when you receive dividends or interest, it is because you are lending your money to the invested company or bank, and they are paying you for that service. They can do that because they will use your money to grow or run their business. So you are indeed justifiably earning the money that comes from dividends and interest. You’re not getting that money for nothing. You should really learn more about these matters before arriving at your conclusions.
I think quite a few academics would argue that you CAN’T beat the index funds in the long haul given the level of risk. That is, you could earn higher returns by taking on more risk, but as you pointed out yourself, the “experts” aren’t such great stock pickers in many cases.
I read an article that compared mutual fund annual returns (there are literally thousands of mutual funds out there each with their own fund managers) to returns on index funds.
It found that only about 10% of the mutual funds out there beat out the index funds. And the 10% change every year. And the fund managers change also.
How you go about figuring out which 10% are going to beat the indexs every year is either a total crapshoot or requires more research than anyone really has time for.
So I agree with you totally that Joe investor’s smart move is index funds.
I have wanted to start a Great Debate about this for a while. I believe that the mutual fund industry is the greatest scam of our time. All it does is cost people money while confusing things so badly that common people can’t see what is happening. Does anyone know of any factual reasons why this is not true as a general rule?
The mutual fund industry offers portfolio diversification (a good thing) to investors who couldn’t otherwise afford to invest in the stock markets.
The mutual fund industry gives an option of generating returns greater than those offered in any bank savings account to average, non-financial-minded people.
The mutual fund industry offers financial planning services to those who might not otherwise avail themselves of a financial planner.
Those are the pros. Now for the cons.
Mutual fund expenses are not readily apparent to investors. Even fairly knowledgable investors have difficulties determining what the actual fees and their effects on performance.
Mutual funds in non-taxable accounts may stick investors with a large tax bill, and this may come at a time when it is disadvantageous to sell the fund shares.
Mutual funds employing soft-dollar arrangements (on the decline, thankfully) have an incentive to trade more often, which increases expenses and might increase taxable gains.
Publicly-owned mutual funds have an inherent conflict-of-interest. There is less incentive to cut fund shareowner expenses, as these expenses are fund revenue which enriches shareholder value.
Mutual funds are finding it difficult to retain star managers, who can earn significantly more managing hedge funds, with much less oversight. Some funds are trying to appease managers by starting hedge funds under the same umbrella, which poses a whole new set of conflicts of interest.
To conclude, mutual funds serve a purpose in the market, but IMO they do not do so as efficiently as possible. I support to work of NY AG Eliot Spitzer, and the other state AGs following his example. They have pushed for more accountability from the mutual fund industry when federal oversight agencies weren’t.
star managers are only as good as their latest 3-year return, and turnover among star managers is high.
Thanks for the answers D_Odds. However, I would argue that pro’s number 1 and 2 could be better met with investments in various index funds. The average rate of return will be higher than virtually any mutual fund over a multi-year measure and the costs are much lower. Index funds offer great diversification with llittle managment or expense. An investor isn’t limited to the huge S&P type index fund either. Smaller index funds focused on a particular sector would allow investors to take advantage of say a biotech or IT boom. That is the type of thing that mutual funds say they are good at but specialty index funds can beat them at that game too.
I don’t own stock, but I know some mutual funds invest solely in dividend paying stocks.
A REIT may be a better investment if someone just wanted dividends, average rates are about 7%.
I have no idea how the taxation for dividends and REITs works or if you are only responsible for capital gains taxes or if you also have to pay SS, medicare and income taxes on them.
Thanks Shagnasty. Three quick points before I leave the office.
(1) All index funds are not created equal. Some firms index funds are nearly as expensive as their managed funds.
(2) IMO, without managed funds, reputable fund firms (such as Fidelity, Vanguard, T. Rowe) could not afford to offer low-cost index funds at the expense ratios that they do. Also, the additional revenues generated by managed funds also fund the financial planning services these firms offer.
(3) The universe of investable securiies in Specialty Indices, such as those you mentioned, are hard-to-define. At the large cap level, do you go with the Barra definition of biotech, or do you go with MSCI/S&P definition? They inclusion of a few issues in a focused index can make a huge difference. These problems are further amplified in the mid-cap and small-cap sections of the market.
If it was easy, everyone would be doing it. Personally, about 75% of my nest egg portfolios are indexed, so don’t take my points as a knock on your ideas. I’m just being pragmatic as to why the industry exists and what makes it run.
People do, its called the ‘voluntary simplicity’ lifestyle and hopefully I’ll find a way to live it someday. People work for 10-15 years, living frugally and investing everything and at the end hopefully they have enough money saved up so that they can live off of their investments which usually include not only alot of investments but a house that is paid off and no debt.
No - no, it really isn’t. There’s nothing “blue collar” about my roots or my current lifestyle and occupation. I simply believe that capital should come solely from work - that it should be earned rather than achieved through gambling or usurious “lending,” whether that means investing in a company through stock purchasing or loaning my friend money in a time of need and then charging him interest. I do not “bury my money in coffee cans” - I keep it in the bank in an interest-free account, mainly because I see no reason to hoard my money in an interest-generating savings account.
Wait, what exactly is frugal about not saving money? Are you seriously saying that saving money is morally wrong? Or is that only saving money in an interest-bearing account that’s morally wrong?
I don’t see it. Why exactly is investing money wrong? What if I save my money for years then buy a farm and support myself from the farm? Didn’t I invest my money in a farm? Isn’t What if I buy something that people don’t value as much as I do, keep that something for a few years until people appreciate it more, then sell it for more than I purchased it for? that investing? Is that immoral? What if I save money and start a business? Why is that immoral? What if I start a business but hire a manager to run the business? What if I buy an already existing business and keep the current managers and employees at their jobs? Is that immoral? What if I get together a group of friends and we all pool our money to buy a business? What if I pool my money with a group of strangers and purchase a portion (or “share”) of a business? Why is that immoral?
You are right. The OP seems to be thinking that new money is just being printed when the more abstract investments pay out. In reality, they are no different than buying a house, working on it night and day for 5 years, and selling it for a profit.
The problem is that whether or not you’re earning interest on your money, it’s slowly being depleted by inflation.
I don’t mean to sound rude, but this mindset is mind-boggling. Are you saying that if you had some spare cash, you would put it in an interest-free account rather than a bank savings account? If so, I’m not quite sure I understand the justification. What do you think the bank is doing with your money? INVESTING it! Why would you possibly want to let your money be invested, whilst not reaping the rewards?
As has been mentioned already, one could easily defend the position that savings accounts or stocks are beneficial to the economy and the nation. Banks are less likely to invest as much if most of their clients’ money is stored in checking (they have no indication that it won’t be withdrawn in bulk with no notice). That uninvested cash is considered stagnant, and is damaging to the cyclical nature of the cash flow.
Imagine you invested in a $100 worth of stock. That investment helpls create new jobs, which in turn leads to more money in the hands of the workers, who then spend it and keep the cycle going.
I fail to see anything dishonorable or disingenous about wise investing.
VCO3, your statements really should be further discussed, but GQ isn’t the place. Let’s move the discussion of the evils of creating wealth to GD