Question: You are mutual fund investor, and you want to minimize expenses while maximizing the probability?
12: Suppose you’re a mutual fund investor, and you want to minimize expenses while maximizing
the probability of achieving performance that exceeds the performance of most mutual funds.
If you narrowed your alternatives to the following, which should you select?
A. Purchase an actively managed no-load fund that doesn’t charge 12b-1 fees and that
invests in small-cap stocks.
B. Purchase an index fund that mirrors the S&P 500.
C. Buy a WEBS tied to the Ireland stock market.
D. Buy the highest rated growth fund.
I am leaning towards B but I am not fully convinced.. can someone help me with this and offer an explanation? Thank you very much
Answer:
"D. Buy the highest rated growth fund.",...or "Growth and Income",..With a track record of beating it's peers,...Compared in a Mutual Fund Letter, like moneyletter.com,..or aaii.com's .."Quarterly Low-Load Mutual Fund Update"...
A fund manager that beat his peers for 3 and 5 years, would certainly beat a Greece Manipulated S+P500 index fund,..That's flat for 10 years..
And then the most important part,..bloody timing,..If you buying this week, you screwed-up big time..Sit on the side-line in cash till a major Market Decline,..Watch the long term trends of the S+P500 index,..and buy the Low..Buy on the backside of a Major Correction,..
You've manage to take control,. don't marginalize it with whole market funds,..and buying when you should be selling...Most market trends average, 1 1/2- 2 years, and easy to follow if you know what you're looking for...."I was looking at it all the while, and never recognized it",..Ah Hah Ha;)
"Well your fund didn't do any better than the Index",.."Yea but I caught 60% of that 80% swing that you watched go by,..and now your average is 6%"
Yacktman Fund 10 years compared to the S+P500 index,.... http://finance.yahoo.com/echarts?s=yackx…
Consider Vanguard funds for low cost.
In general small-cap stocks have out performed other funds on balance. That is because smaller cap stocks have more of an opportunity for growth and also because they have a tendency to be less followed by Wall Street meaning there might be more bargains found there.
Certainly, B will provide you with the least expenses overall, but you would also like to maximize the probability of achieving better than average results.
D. is problematic. Growth funds tend to buy stocks that are overpriced which tend to lead to less than good results.
I would go with B.
The S&P 500 index has beaten nearly two-thirds of all actively managed large-cap mutual funds over the past three years, the report said. Further, S&P's semi-annual SPIVA (S&P Indices Versus Active Funds) scorecard reported that 75 percent of actively managed mid-cap funds were bested by the S&P MidCap 400 index and that returns for 63 percent of small-cap funds were exceeded by the S&P SmallCap 600 index.
Folks, it's a multiple-choice homework problem, not a real life investing decision!
B = answer.
The point is that few actively managed funds beat index returns over the long term. Most index funds have lower costs than active managers, so this edge is enough to make them a bit above average.