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May 07, 2008

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Hi FMF,

Saw your posting and had to comment quickly.

The major problem with index funds is that you'll never do better than the index. If the fund manager is performing their job properly, then you'll do just as well, no better and no worse than the overall index fund. In short, you will never hit a home run with index funds.

Also, the assumption that stock markets have a positive overall bias over time is based on analysis of American equity markets over the past 50 years. There is no guarantee that the overall bias will continue upwards its also entirely likely that markets could be flat or even trend downwards in the next decade.

I think one is far better off investing in profitable individual stocks or starting their own small business.

Best,

James

Hi FMF,

Saw your posting and had to comment quickly.

The major problem with index funds is that you'll never do better than the index. If the fund manager is performing their job properly, then you'll do just as well, no better and no worse than the overall index fund. In short, you will never hit a home run with index funds.

Also, the assumption that stock markets have a positive overall bias over time is based on analysis of American equity markets over the past 50 years. There is no guarantee that the overall bias will continue upwards its also entirely likely that markets could be flat or even trend downwards in the next decade.

I think one is far better off investing in profitable individual stocks or starting their own small business.

Best,

James

James --

With index funds, you gross return is "average" but your net return (after taxes, fees, etc.) is way better than average.

"The major problem with index funds is that you'll never do better than the index. If the fund manager is performing their job properly, then you'll do just as well, no better and no worse than the overall index fund. In short, you will never hit a home run with index funds. "

And you'll never hit into a double play.

"Also, the assumption that stock markets have a positive overall bias over time is based on analysis of American equity markets over the past 50 years. There is no guarantee that the overall bias will continue upwards its also entirely likely that markets could be flat or even trend downwards in the next decade."

Actually it's based on global equity markets over the last ~100 years. And if markets are flat or down for the long term, the correct play isn't to go buy individual stocks, it's to stay out of the markets altogether. Go buy a CD or something.

"I think one is far better off investing in profitable individual stocks or starting their own small business. "

(1) Sounds great, please provide a list of 10 stocks that you think will outperform the market, and tell me what timeframe you're talking about. Or is it not that easy?
(2) Advantages of index funds over starting a small business include diversification and about 3000-4000 hours of time NOT spent on working on your new business every year.

http://www.forbes.com/2001/06/01/0601funds.html
http://gregmankiw.blogspot.com/2006/07/case-for-index-funds.html

James,

The key reason to buy an index fund is to broadly diversify and lower your overall risk. You're not going to hit a home run, but you also won't be striking out. With individual stocks you have much higher risk since you've got all your eggs in one basket.

If you don't think the market will go up overall in the long term then you should probably not be investing in stocks at all.

Jim

Points given to Ben for promoting index funds.

Points taken from him for promoting annuities, promoting creationism, and writing market-timing articles and books. (And for those annoying commercials about eye wash!) He's entitled to his opinions, but as a public figure promoting these things reduces his creditability.

Here's the thing: Ben Stein is a fucking creationist. Nothing he says about anything else has any credibility. He is a fool.

I don't care that he is a creationist or if he thinks the earth is only 4000 years old. Heck, I wouldn't care if he were a scientologist. I do care that he feels like he has to proselytize these views.

(And what's with the annuities, market-timing, and eye-wash commercials???)


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