Investing Made Simple

[Bluesman7]

Investing Made Simple

I learned of this (currently free) book via a financial website I frequent.

The book is a primer on the benefits of index fund investing and extolls the virtues of that method of simple, low cost yet effective wealth management.

This book would be useful to both novice investors as well as to those who would like to learn more as to why investing via index funds can oftentimes be superior to "managed" funds:

http://www.obliviousinvestor.com/200...g-made-simple/

Hope some of you will find this one useful...

(Edited to add that I am not the author nor am I associated with him or the website in any way.)

[Bluesman7]

Guess it's not a very popular topic.

Well, I tried.

[Bilbo1967]

Hey - don't take it personally Blues.

There's people on this forum who seriously believe that buying five different e-readers is a solid investment!

[Bluesman7]

Originally Posted by Bilbo1967

Hey - don't take it personally Blues.

There's people on this forum who seriously believe that buying five different e-readers is a solid investment!

Thanks, Bilbo. I don't think I'll lose too much sleep over it.

(And hey, who knows, they may be right... )

[duskdawns]

This really seems like Investing for Dummies/Personal Finance for Dummies/Mutual Funds for Dummies and other similar books in those series.

The book is too basic for anyone with a finance/investment/business background, but might be useful for someone without that knowledge whatsoever.

For those who don't know, index-fund investing is simple because your portfolio holdings just track whatever index it is linked to, whether it's the Dow Jones Industrials, NASDAQ, S&P 500 or other market indices.

If the index goes up, the value of your portfolio does too, and vice-versa. If you had investments in an index-fund over the last year or so, it would have gone down, down, down in the bear market- although it's now retracing from its fall to the bottom, it's still way off from the highs reached in October 2007.

Although it can sometimes be superior to managed funds, the reverse is also true that managed funds can outperform indexed funds.

Also, managed funds can be lower cost as well, such as no-load mutual funds. The investor should seek funds with no or the lowest commissions/managing fees.

I would suggest to the novice investor to read this book, but keeping in mind it is only one component of all investments: equity (domestic and international stock), mutual funds and ETFs(exchange-traded funds), fixed income (corporate and government bonds), commodities, treasuries, real estate, foreign currencies, cds and other money market instruments, etc.

And then pick up a more comprehensive guide to basic investing.

[jinlo]

If you want a real tip, buy Consolidated Lint and Amalgamated Dust.

They're going places!

[doreenjoy]

Thanks to the OP for posting the link. If I wasn't already a firm believer in the wisdom of index funds, I would have downloaded it.

And to address some points made above, at the risk of sounding pedantic --

Actually, "low cost" does not solely refer to the load or commission of purchasing a fund. Low cost also refers to the cost of managing the fund. Index funds have a wafer-thin management cost of 0.02%, while even the cheaper managed funds cost over 1%. That means that every year, you are charged 0.08% more (at least) simply for the dubious priviledge of being in the managed funds.

While it's true that some managed funds do beat the performance of an index in the short term, no one knows what those winning funds are in advance. Studies have shown that between 60% and 70% of managed funds will NOT outperform their respective index funds. If you're very lucky, you can beat an index. Even Peter Lynch could not keep the Magellan fund consistently above the index.

Also, over time *all* funds will revert to the mean (the mean being the index's performance). So if you have a long investment time horizon, you can't beat the performance of an index fund, and you won't have to lose sleep over it.

[duskdawns]

Originally Posted by doreenjoy

Actually, "low cost" does not solely refer to the load or commission of purchasing a fund. Low cost also refers to the cost of managing the fund. Index funds have a wafer-thin management cost of 0.02%, while even the cheaper managed funds cost over 1%. That means that every year, you are charged 0.08% more (at least) simply for the dubious priviledge of being in the managed funds.

-I did say in the previous post that an investor should seek funds with no or the lowest commissions and management fees. And in cases where the managed fund performs better than the index funds, there will be a higher return that more than makes up for a slightly higher fee.

Originally Posted by doreenjoy

While it's true that some managed funds do beat the performance of an index in the short term, no one knows what those winning funds are in advance. Studies have shown that between 60% and 70% of managed funds will NOT outperform their respective index funds. If you're very lucky, you can beat an index. Even Peter Lynch could not keep the Magellan fund consistently above the index.

-It's misleading to tell an investor that an index fund is 100% for sure going to have a more successful performance than a managed or mutual fund and that you will reap gains just by passively investing everything into an index fund. That assumption only is valid in a bull market or upswing. Think about all those whose net worth has declined just as they were about to retire in 2008 and 2009. Furthermore, an active investor will stay with a certain fund and strategy and make portfolio modifications as necessary over the course of the investment period.

Originally Posted by doreenjoy

Also, over time *all* funds will revert to the mean (the mean being the index's performance). So if you have a long investment time horizon, you can't beat the performance of an index fund, and you won't have to lose sleep over it.

-I'm not saying that index funds don't serve a purpose. They can be one part of a multi-prong investment approach. However, they have their limitations, namely plunking everything into an index fund does NOT diversify an investor's portfolio. And everyone's risk tolerance and portfolio allocation will be different depending on age, stage in life and other factors. Those with little knowledge and time will be passive investors for whom an index fund or mutual fund may be more appropriate, but again as one part of the whole. Whereas a more hands-on, savvy investor will take a pro-active approach to their investment portfolio.

[doreenjoy]

duskdawns - It's misleading to tell an investor that an index fund is 100% for sure going to have a more successful performance than a managed or mutual fund and that you will reap gains just by passively investing everything into an index fund


I didn't say that. I said that studies have shown that between 60-70% of actively managed funds do not out-perform their corresponding index, and that is true. It is also true that given a long investing time horizon, all funds will revert to the mean. Assuming the extra risk of an actively managed fund when over a long time horizon you will earn only the mean is generlly not prudent.

As to diversification, you can achieve high levels of diversification using nothing but index funds. I have a very well-diversified stock portfolio of several different index funds, and I'm satisfied with my returns. I also have quite a bit in bonds + cash. My portfolio is boring but solid; gambling is not something I enjoy.

Anyone who is on the verge of retirement should not be more than 50% in stocks, but people get greedy and no one ever thinks a bull market is going to end. Having lived through 1974 I never trust long bull markets.

But that is all IMO, I am not an investing guru, just a CFO.

[Bluesman7]

There are many excellent books to be recommended as follow-ups to this volume by such excellent sources as William Bernstein, Rick Ferri, Larry Swedroe, Daniel Solin, John Bogle, Burton Malkiel, and the "Bogleheads" amongst others but none of them are currently "free" afaik and therefore I have left them out of the discussion.

Truth is that someone with little knowledge of investing could do quite well for themselves over time with just the modicum of knowledge and effort that could be gleaned and used as impetus from reading "Investing Made Simple". You don't have to "beat" the market to have better than average results as an investor.

I don't think hashing out the minutiae of investing in this thread will provide a service to those whom this book will most benefit. Of course that's just my opinion. (And Doreen, you and I are on the same page. I'm only CFO of my own family's finances but having retired at age 50 I'm not complaining. )

[duskdawns]

Passive vs. active management is an ongoing debate for which there is no resolution. There are risks and benefits to both types of funds.

Why do high- and ultra-high net worth clients, endowments, pensions invest with asset management companies if index funds are the only way to go? Guys like Bill Gates and Michael Dell have investment companies, Cascade Investment and MSD Capital, that exclusively invest their fortunes. Abigail Johnson (Fidelity Investments), George Soros (Soros Fund Management), David Shaw (D.E. Shaw), John Templeton (Franklin Templeton), and Warren Buffett (Berkshire Hathaway) did not become billionaires by adhering only to index fund investing. (John Bogle, the index fund guru, did not make the recent Forbes lists of 400 richest Americans nor the World’s Billionaires, unlike the others mentioned above- with the exception of Templeton who is deceased. Although Bogle is plenty rich from the steady revenue stream from investors pouring into index funds.). There are other investing styles, such as value and growth that should also be taken into consideration.

http://www.forbes.com/2009/03/11/wor...ires_land.html

For instance, an S&P index fund misses out on opportunities that can arise from bargain-hunting/arbitrage, geography, small-cap/mid-cap, sectors not covered by a broad market index, socially-responsible investing, flexibility to re-calibrate portfolio composition in anticipation of or response to market volatility and business conditions, etc. It’s one slice out of a whole pie. Using a combination of index funds does diversify it somewhat, but only up to a point. There still is no diversification in terms of investing style and other factors. Moreover, the stance that an index fund will have good positive returns is critically dependent on the timing of the investor’s entry into and exit from the investment.

Even Vanguard, the pioneer of the Index fund, has a section on their website titled:

How index and active funds can work together
Index funds and active funds can complement each other in your portfolio.

https://personal.vanguard.com/us/wha...ive?Link=facet

One blogger wrote here how Vanguard has actively managed funds that beat their S&P 500 index fund:

http://steadfastfinances.com/blog/20...00-index-fund/

A reason for the difference in opinions is that your frame of reference is from a historical perspective, looking back at investing from 30+ years ago to now. The two of you are either retired or nearing retirement, so naturally will tend to be risk averse (and also are not new investors in the stock market). Those in similar situations should have considerably reduced exposure to stocks, less and less as your retirement date approaches.

In contrast, those who will retire after Social Security is insolvent will need to be more aggressive (but not reckless) in their long-term strategy. My viewpoint is a future-oriented perspective, going forward from the present through the next 30-50 years.

There are few truly new stock investors in their 50s-60s (who should be gradually exiting from the stock market, not entering), maybe some in their 40s (most will already be in there somehow via a 401K or IRA), while the vast majority of first-time stock investors will be in their 20s-30s. For them, an index fund is merely a starting point, not the be-all, end-all in their investment portfolio.

Additionally, risk tolerance (low-risk, lower reward or loss; high-risk, higher potential reward or loss—stocks, even in an index fund, are a not risk-free asset) is a very individual trait. I consider myself to be on the conservative side (I guess I’m at the high-end of the conservative perhaps low-end moderate, whereas you two are at the low-end of the conservative spectrum). I would not go near high-yield bonds or derivatives, though there are some people who do and that’s why they are aggressive, investment-wise. And then there is a group that falls in the moderate category.

Furthermore, another basis for the difference in opinion is due to the incipient shift in the investment paradigm. In the 20th century, the US was the preeminent economy and home to the foremost financial markets in the world. While the US is still in the lead, the situation is in flux in the 21st century.

This is the beginning of the Emerging Markets Century (posits Antoine Van Agtmael, former World Bank economist in his enlightening book), and investors should branch out into Asia, Latin America, and the stock markets of other emerging markets, as well as Europe.

Like it or not, China will become the world’s largest economy at some point this century. Just as the Chinese economy is expected to overtake US economy, projections range from 2025-2035, so will the stock markets.

Mark Mobius, executive chairman of Templeton Asset Management, oversees about $25 billion in emerging-market assets. He said this summer that “China’s stock market may surpass the U.S. as the world’s largest by value in 3 years.” Regardless of the number of years it will take, inevitably it will happen.

As of July data, the Standard & Poor’s 500 Index has gained 4.1 percent in 2009, while China’s Shanghai Composite Index has soared 75 percent this year. “The MSCI [Morgan Stanley Capital International] Emerging Markets Index of equities in 22 countries has climbed 38 percent this year. That compares with a 6.8 percent gain for the MSCI index of developed markets.”

How is the aforementioned relevant to the index fund vs. actively managed fund discussion?

Jim Rogers, co-founder of the Quantum fund with George Soros, realized gains of 4200% in his international fund as compared to 47% for the S&P, after which he retired to travel the world on motorcycle.

In Jim’s words, "If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia." He moved from NYC to Singapore, as have many investment professionals and financial institutions flocked to Asia.

Burton Malkiel (A Random Walk Down Wall Street; From Wall Street to the Great Wall) has said that in certain emerging markets, it is better to have a managed fund than an index fund because they can be inefficient.

For numerous reasons including the lack of transparency, the different accounting practices in China, Asia, Europe compared with US G.A.A.P. and whatnot (it’s complicated and would take too long to go into detail), China is one country where an investor would benefit from a portfolio manager who has connections to and direct information from company management to assess when picking the stocks and building the fund than from following an index fund, which can be subject to the whims of market hype and gyrations and carry more risk than a managed fund.

India, Brazil, Russia, Mexico, South Korea and other emerging markets stock markets are other financial markets in which a guided hand is probably better than a passive style.

An article about investing in India making the case for why a managed fund might be better than an index fund here:

http://business.rediff.com/report/20...uity-funds.htm

As the US (and developed markets) share of the total global stock markets falls and the percentage for emerging markets rises, an investment portfolio will correspondingly become overweight and underweight in those categories. Given an investment time horizon spanning the forthcoming 30-50 years and more, if the US portion is 50% and emerging markets 50%, for the sake of simplicity, do you really want your entire portfolio to be 100% in an index fund knowing full well that at least half will likely be better off in a managed fund?

Therefore, I think investors should not only have US and international equities in the stock portion of their investment portfolio, but also I believe they should probably incorporate both active and passive investing styles (as does Vanguard, the index fund proponent) over the long-term, especially in light of the economic and financial dynamics in this century.

Check Morningstar for a comparison of index returns:

http://news.morningstar.com/index/in...ion=IdxReturns

Look here and you will see some trends in mutual funds:

http://www.morningstar.com/allanalys...s.html?type=FO


In conclusion:

Read this book, if you want, then read more books/websites/magazines/newspapers, do your research, discuss with your financial advisor(s), and tailor your investment decisions to your goals, circumstances, timeframe and personality. Just remember to diversify and employ asset allocation and re-adjust your holdings over time.


P.S.
Like medicine and law, finance is very broad with many specialties within that field, variations across industries and complex nuances in the practice thereof. Being a CFO of a publishing company or consumer goods or pharmaceutical firm or family business or start up or multinational corporation or non-profit organization is not entirely the same as being the Oracle of Omaha, otherwise known as the head of Berkshire Hathaway and the #2 richest man in the world this year (#1 last year). Which I’m not. What I will say is that my friends, classmates, relatives and myself have work experience at Wall Street/Financial District, the Federal Reserve, investment banks, hedge funds, asset management, private equity and other financial firms and have degrees from the top 30 schools on this list of 100:

http://rankings.ft.com/businessschoo...l-mba-rankings

I would venture a guess that almost none of us would subscribe to an index fund only investment philosophy. Quite a number are bigger risk-takers than me, and that’s reflected in their disproportionately higher net worth. It’s no small feat for someone in their 20s-30s to hit a million+ when many older adults haven’t even done that. They do have the advantage of learning from respected investment pros who are worth tens and hundreds of millions, which definitely plays a role in honing their insight, expertise and success. I am a total layperson/underachiever in comparison with those in my network of overachieving outliers, who can make this case way better than I can.

Sigh. Next time someone laments not having any comments or activity in a thread, I think I may just ignore and not respond.

But I did feel compelled since Bluesman referred to “those whom this book will most benefit”, who will for the most part be novice investors in my generation and the ones following and not in Bluesman’s or Doreenjoy’s generation. They need to hear all the varying perspectives to make their own judgment rather than rush to conform to your biases against managed funds, whether it is by themselves or in conjunction with index funds. [Another issue is that with more babyboomers retiring, there is a smaller population for them to sell their shares to when they liquidate. Down the road, even with foreigners buying US stock (index) funds, and who knows if the government will impose limits, there may wind up too may sellers with respect to buyers. When demands falls, price will too. But I digress…] So there is some degree of generalization and fallacy in assuming that index funds will have a high return on investment in the future. Maybe, maybe not. Some of the hitherto prevailing theories in investment will stay the course and some will become obsolete. Investment geniuses (not me) will develop new models and strategies for this century.

Hence their conviction in index funds may be fine for those who will stay in the stock market within the next 5 years give or take, but may not be applicable to novice investors who will be participating in the markets through 2050 and beyond, ostensibly the target audience of this ebook. They’re entitled to their opinions and their prerogative to invest strictly in index funds; I’m entitled to my opinions (everything I’ve written is just my opinion) and my right to invest in both index funds and managed funds. Whatever works for you.

THE END.

[pking36330]

Originally Posted by doreenjoy

Low cost also refers to the cost of managing the fund. Index funds have a wafer-thin management cost of 0.02%, while even the cheaper managed funds cost over 1%. That means that every year, you are charged 0.08% more (at least) simply for the dubious priviledge of being in the managed funds.

Using Ms. Doreenjoy's numbers, a managed fund at 1% load would have to gain 0.8% more return per year than a 0.2% load index fund just to equal the return from a fund that isn't really managed. Betting on 'the Man' or 'the Machine'?

To be fair, during very turbulent times (anyone think of any lately), the managed funds are better at adapting to rapid or unusal market forces.

I would have to agree with the other posters that Index Funds can be a useful addition to an investment portfolio for all but the full-time professional traders as long as they aren't the only item in the portfolio.

[Bluesman7]

duskdawns, i'm glad you're pleased with yourself and your point of view but don't presume by my simple recommendation of the free title above that you know anything about my experience in the stock market or personal investing history.

In over thirty years of experience I have utilized everything from trading to technical analysis to the purchase of individual stocks and bonds to managed funds and ultimately index funds. I won't attempt to lay out an analysis of how each did relative to the others.

The purpose of this thread was not to expound upon my personal investment journey (nor yours for that matter) but simply to recommend a book that some might find of interest.

If they are truly interested, they will find ample reasons to investigate the subject further.

Please feel free not to reply in any of my threads in the future. My remark about the lack of replies was tongue in cheek. Frankly, had I even suspected that you'd come in with your smarmy comments I'd not have bothered.

[JSWolf]

Originally Posted by Bluesman7

Guess it's not a very popular topic.

Well, I tried.

Actually, one reason it's not popular is that it's letter sized PDF with large margins. This does not work well with the majority of readers. If it was in say ePub and Mobipocket, it would probably be more popular at MR.

[Bluesman7]

Originally Posted by JSWolf

Actually, one reason it's not popular is that it's letter sized PDF with large margins. This does not work well with the majority of readers. If it was in say ePub and Mobipocket, it would probably be more popular at MR.

Thanks, Jon. My only experience is with the Kindle 2 and using the Mobipocket Reader (and creator) for conversions and/or PC use.

The Reader did a serviceable job for conversion which I transferred to the Kindle though I must say there were clearly some issues with some words running on into others. (The charts converted without issue, however.)

In any case, if nothing else, I've learned never to remark upon why a free book doesn't seem to get any traction.