Finance and Economics > Investing and Saving

Index vs Actively Managed Funds

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Jack Crabb:

--- Quote from: Fib Posure on January 24, 2009, 05:59:07 PM ---In my opinion, index investing is really just another form of active investing. An index fund is only as good as the index it uses, and when you choose a specific index you are actively managing your investments. For example, if you invest in an index ETF that tracks the S&P500, you are actively choosing the S&P500, which is simply a group of large companies in America. You are completely ignoring small companies, foreign companies, real estate, and commodities. Of course, you can buy index ETFs for all these. My main point is don't put all your faith in one index.

--- Quote ---Vanguard S&P 500 Index.  Set it and forget it.
--- End quote ---
No foreign investments? Why so much faith in America?

--- End quote ---

The S&P500 is a little more than "a group of large companies."  3M, GE, Boeing, Time Warner, etc. are not just large companies in America, they are large companies in the world.  Many are unique in the world, Adobe, Apple, Disney.

I am actively ignoring small caps, foreign stocks, real estate, etc. for a couple reasons.  First, they are relatively less efficient markets than the S&P500 companies.  The S&P companies are actively monitored by analysts, press, etc.  Everything there is to know is known in near real time.  Foreign companies do not have the accounting/reporting requirements that US companies have.  Real estate is a small market and not diversified.  Second, you will get all the performance there is to get from an S&P index.  There is no need to pay for management/research.  Management/research is essential for small caps, real estate, etc. to be any near profitable.  That cost reduces the investment return.  Even then, the index beats the majority of the actively managed funds.  Third, it takes a substantial amount of money to meaningfully invest in all the foreign, large, small, etc. investments.

What do you mean no foreign investments?  I have used MS Windows, drank Coke and Bud, and seen Ford/GM/Caterpillar vehicles/machinery around the world.  US companies have a foreign presence in a ways that no foreign company has in America.

I have so much faith in America, because I haven't found another country to put faith in.  When the US has a cold, the rest of the world gets the flu. 

Go down the list from Argentina to Zimbabwe and the US economy comes out ahead of them all.  I think the world consensus confirms that.  Lots of people still trying to come here.  Not so many here trying to leave.

Fib Posure:
By investing in American businesses because of the belief that American companies are more transparent, etc I think is a form of active investment since you are actively selecting one country. In a way that active investors research a company and invest based upon that research, you can research countries and invest based upon the research.

The efficient market hypothesis claims that any information you gather on companies has already been priced in, so even if you find information that suggests that, say, McDonald's will do well, then the price of McDonald's shares will have already gone up too high for the shares to be worth it. The same thing can apply to country. If we assume efficient markets, if there are features in the American economy that make American companies superior, this would be priced in automatically and American companies become overvalued.

It is true that American companies invest outside the country. But there are still risks in investing only in one country. There may be laws specific in the US that affect only US companies. For example, specific antitrust laws or corporate welfare laws may reduce the competitiveness of US companies.

Investing in commodities like precious metals can help if there is inflation or stagflation. I remember in mid 2008 when petrol and food prices went up. So far the price of silver seems to move with the price of oil and food.


--- Quote from: chris on December 15, 2008, 12:18:23 PM ---Active. I gave my money to Peter Schiff last year.

--- End quote ---

Here's a good video of Peter predicting the coming recession. Be sure to watch all of the other talking heads belittling him.

Here is a good article about Peter Schiff's predictions.

Make sure to read the last two paragrahs.  Being right didn't help him make money.

I don't think "set it and forget it" is ever good advice.

How much did you lose in your 401k with this advice? 

At the beginning of 2008, my 401k suffered three consecutive quarters of loss.  It wasn't a big loss, but more then I'd like to see, and I moved all of my money to the most conservative fund available to me.  I have since recovered and am heading in the right direction again.

I know that my other thread about Series I Bonds ended up rather negative, but I must reiterate that they are a fantastic investment.  Take a look at this chart from the below website.  He compares a fixed monthly investment in both Series I Bonds and a Vanguard 500 indexed fund.

This chart speaks for itself.

There is no one who cares about your money as much as you do.  So, the best thing you can do is to manage your own money.  Don't rely on someone else to do it.  Jack has even talked about this in the podcasts.


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