There are a couple fund managers with good 10 year performances, so I might post a few of them at a future date.

Sure it’s possible, but it’s anything but a slam dunk and difficult to achieve year after year. If you can do it hats off to you!

A couple months later, after attending a talk with one of the hot shot economic analysts at our firm (making their predictions for 2008) I had questions, but couldn’t raise them in the public forum for fear of being flogged on the spot and probably escorted out of the building by security and asked not to return to work the next day. So I later sent the analyst a few pointed questions and asked for his thoughts (I know he read it because I sent it return receipt) and never received a reply.

The key question I had centered around index funds, people pumping money into them and how it was providing a false sense of a strong market. In essence that it was a self-fulfilling prophecy. At the time, index fund investing was on a big upswing, Bush was advocating letting people invest a portion of their Social Security contributions (in the market), HSAs were coming (more investing in the market), 529 college savings plans were pumping money into the market, then the index funds needed to buy more furthering demand for stocks, and so on. I asked the analyst “I see this happening, and it is predicated on the index fund investor not being trigger happy, putting his money in and letting it grow. However, don’t you think that when the music stops and the index funds get hit with redemptions from Average Joe (who says he’s a long-term investor, but will dump everything if he sees he’s lost 10%) we are going to see this upward spiral work in reverse when the index funds have to sell, put downward pressure on stocks, which invites more selling, etc., etc.?” Well, I don’t remember who that hotshot analyst was, but the way things have played out makes this keyboard jockey smile knowing he was right, and there is absolutely know reason to listen to what Wall Street tells you or who recommends what – because they don’t have a crystal ball or any special information.

I own them and think they make a solid low cost hedge against any screw ups I might make in my own trading accounts, but I don’t think they’ll put any serious growth prospects in a portfolio unless you specifically go for the small to mid cap index funds or maybe the Russell 2000 index fund.

I think what many people don’t seem to understand is that the indices are just a barometer of the economic climate, and when nearly every stock in that index is facing a bad business climate, index funds aren’t going to provide as much protection as they think they will.

I think you answered the question yourself with the “identify such funds ahead of time” statement.

That’s the whole premise of becoming a stock picker yourself, or sticking to actively managed funds. You’re rewarded for making the right calls versus getting what everyone is getting via an index fund. Naturally, you reap the rewards or suffer the penalties by breaking away from the herd. In some rare cases, you can get an actively managed fund for free by selecting the right stocks (but they’re subject to the same market pressures as everything else).

Naturally, not everyone is willing spend copious amounts of time to manage their own portfolio (fee free I might add) or should they attempt to open themselves up to the fairly massive risks that individual stocks can have. The reality of the situation (I’m not much of a theory person) is that I’ve gotten zero gain on the index funds I bought in 2000 (S&P is down ~20% for the decade without dividends). I’m patient, but a decade long wait is bit much.

The thrust of the anti-index fund argument (and I’ve written several pro-index fund posts as well) is that they’re a “compromised” investment class in the sense that they are required to hold all the equities in the index they track. So they get to hold the best companies, but they’re also required to hold the laggers as well.

Call me crazy, but I’d rather build a portfolio of stocks I consider A, B, and C stocks rather than select a majority of C stocks with equal weights of A, B, D, and F stocks (see the bell curve section).

Thanks for commenting!

I’m no trader, and this is an academic argument, but you haven’t addressed it. You claim that you _can_ do better than the market by pointing to particular funds that have, but that’s useless without a cost-effective way to identify such funds _ahead_ of time, and the index fund thesis is that doing so usually costs more than one can gain.

please elaborate.