Wednesday, June 29, 2005

If it don't make dollars, it don't make sense

Attention all those burdened with federal student loans: Consolidate your loans before this Friday morning in order to lock in a low interest rate before the impending rate hike on July 1st, 2005 In the Year of Our Lord. Start your engines here, racefans.

While I'm regarding worshipping God through honorable stewardship, get your annual free credit report from all three major credit agencies here. You are eligible for a free report from each credit agency, for a total of three reports, per year. So, you may want to peep one right now, and two later, or whatever your heart desires.

A quick point that I don't have the time or inclination to properly back up right now but deserves mentioning is:

Indexed funds are a far wiser investment than actively-managed mutual funds (most funds are actively managed). Index funds are basically betting on capitalism, which will always win in the long run. A common index is the Standard & Poor's 500, a group of 500 companies in leading industries that reflects the U. S. stock market as a whole (as opposed to specific "hot" sectors). One example of an index fund is the Vanguard S & P 500 Fund, which attempts to mirror the index as closely as it could by buying each of the index's 500 stocks in amounts equal to the weightings within the index itself.

Other mutual funds are betting on the capabilities of the fund manager, but historically it has been shown that over relevant periods of time, such as 25 years, actively-managed funds do not fare better than a fund coolly indexed to the S & P 500.

The best part about investing in an index fund is that you make straight up cash (10% a year is a fair average). The worst part is you do not participate in all the emotional, exciting, hot stock tips that everyone else prattles about. The index fund is like the Terminator, it does not cry, does not laugh, it just dominates.

2 comments:

matt said...

interesting about the index funds. i've been more of a mutual fund guy, but i think you've intrigued me to look into this.

Oneway the Herald said...

Yes, sir, please do look into them. I’m getting a large part of my information from “The Intelligent Investor” by Benjamin Graham, who is considered the father of value-investing. Warren Buffet, the first billionaire to make it in stock investing, is his most famous student. Other research I’ve read backs up his claims (Money, Motley Fool).

Even considering the possibility that you choose an actively-managed fund with a prodigious manager at the helm, any gains his maneuvering grosses are eaten up by trading costs, taxes, commissions, other overhead, etc. to reduce your return. It is also prudent to look at the mutual fund as a business. A fund that has great success over a given year attracts many new “investors” that want to get in on the action. Thus, the fund manager is under pressure to try and replicate his past returns, when most probably at most his above-average returns were due to momentary brilliance and at the least just plain random good fortune. Regardless, new money comes surging in, and now he’s got to repeat the great success, because the new “investors” (Graham points out this type of customer is more a gambler than an investor) certainly won’t be happy with their return falling, even if it falls to average levels. So, the fund manager takes riskier moves, eventually makes enough bad ones, and cools off at your expense.

It seems the best course is to invest in indexed funds, unless you are serious about security analysis.