Wisdom from Readers: Saving Money and Performance of Index Funds

One of the great parts of Free Money Finance is the comments. Readers leave hundreds of comments every month and many of them offer some exceptionally good advice/suggestions. But I know that many people don't have/take the time to read the comments, so I thought I'd share a couple good ones in one big post.

We'll start with a money saving tip left on my post titled Another Example of Asking for a Discount Saving Money:

I'm at the point in my life where I am constantly attending weddings, and many of them require travel. More often than not, when the couple has a "preferred guest rate" at a hotel, it's not always the lowest rate. Last week I called a Courtyard Marriott and found that the wedding rate was $175. I asked if they had a lower rate, such as AAA, and they did - for $116! So I booked the lower rate and told my friends to do the same. I very often ask for the AAA rate, even though we aren't AAA members. I have never, ever, been asked to show my AAA card upon check-in.

I do have a AAA membership and often get the discount. Come to think of it, I've never been asked to show my card either. Is this honest though?

Next is a great comment left on my post titled What Will Happen to the Stock Market in 2008. I am regularly surprised when people comment that investing in index funds simply gets you an average return. This commenter responded to such a thought from someone else -- and he responded just the way I would have:

Jake, good points except you got one little thing wrong: investing in an index fund will lock in above-average returns over the long run, not merely average returns. It's counter-intuitive at first that the average return can be above-average but when you take expenses and transaction costs into account, it's evident that index funds must mathematically have above-average returns.

Exactly. Right on the money!

Comments

[MonkeyMonk]

I posted this in one of the original comment threads but I think it's worth posting here as well:

What do all you indexers think of Warren Buffet's recent comment as part of his annual stockholder report that he thinks there's little chance that the US markets will continue at 8%-10% average? Here's the exact quote:

" . . . Buffet says that 10% returns on equity compounded for the century will see about 24,000,000 on the Dow by 2100. He adds that, “- If your adviser talks to you about double digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: ‘Why, sometimes I’ve believed as many as six impossible things before breakfast.’"

Just curious. I'm also a big proponent of buying index funds but I think I agree with Buffet's assessment.

[Kyle]

Buffett could quite possibly be correct, but if so index investors will still fare better on average than other investors. I personally have about 40% of my portfolio indexed overseas, so a lower domestic rate of return won't be devastating. There will be high returns somewhere and I intend to capture them.

[FMF]

Monkey --

I answered on the other post. Comment was similar to Kyle's.

[Traciatim]

Working in the hotel industry (in tech support, not really hospitality) I would say the AAA rate thing is more than fair, as long as the conversation goes like this:

FDC (Front Desk Clerk): Your wedding rate would be $175
Guest: Sounds expensive, do you have a AAA rate?
FDC: Sure, it's 116.
Guest: Could I get that rate instead?
FDC: Sure thing.

If the conversations goes like this it's lying:

FDC: Weeding rate is $175
Guest: I'm an AAA member, what is that rate?
FDC: That rate is $116
Guest: Could I book that rate instead?
FDC: Sure Thing

Notice the difference, in situation one you ask the rate and ask to book that rate. In situation two you declare yourself a member and then ask to book that rate and that's lying.

[Tim]

MonkeyMonk,
In Buffet's annual letter to shareholders, the paragraph before Buffet's comment on Dow 24,000 makes a case for Index Funds and passive investing:

“Naturally, everyone expects to be above average. And those helpers – bless their hearts – will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the “know-nothings” – must win”.
- Warren Buffet

I actually wrote about this same topic on my blog today.

[Jake]

"I am regularly surprised when people comment that investing in index funds simply gets you an average return"

Since you chose my comment as a representative of this view (and a response to my comment as a representative of your view), please note the following.
(1) I think that doing average is a good thing.
(2) If you invest in index funds you will get average stock-market performance. If you invest in mutual funds and pay fees, you are likely to get below-average performance. Average performance is not defined as "what the median investor receives after all fees etc". It is defined as what an investor would recieve if he/she was invested in an average basket of stocks availible on the market -- i.e. the index is by definition average. Most people's returns are below the average market return. If you want to define average in a different way, that's fine, but at least recognize it's a question of semantics. Does "average" refer to "average mutual fund investor" or "market average"? I say the latter, you evidently say the former. Doesn't make me wrong.
(3) The comment you excerpted for your post actually referred to index fund returns as "average" in the process of correcting my statement that they were "average". This illustrates my above point quite nicely I think.

[Becky@FamilyandFinances]

I have a AAA membership and also usually don't get asked for my card. I did get asked when checking in at a LaQuinta hotel in Colorado last summer, though. Of course, I had accidentally left my card at home and had to call AAA and ask for my member number.

Just so you know, they do sometimes ask for your AAA card!

[Lin]

I also use the AAA discount (I am a member.) Used to be I was never asked to show my card, but that's changed. It maybe that hotels are tightening up on these kinds of things... so beware.

[Trent D.]

Asking for the AAA discount when you're not a member is lying, plain and simple. If you have the membership, by all means use it!