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Rick Ferri Blog
What is an index? It’s hard to say these days. An index used to be a broad measure of market value. Today, it appears to mean any list of securities that are configured and managed in any way. This makes indexing confusing. To make things worse, mutual fund and ETFs that track these lists are being called index funds. I believe the Securities and Exchange Commission (SEC) needs to redefine what an “index” and “index fund” are because they’re not what they used to be.
Did you see that!? Another amazingly bright mutual fund manager burned out. After a streak of greatness, his fund’s performance went pitch black. Missed it? Just wait — they’ll be plenty more. The mutual fund universe is full of shooting stars. In fact, picking a manager based on his or her superior past return more often results in sub-par returns than a repeat performance.
A recent tax article written for Forbes by William Baldwin caught my eye. The article discussed how a hypothetical wealthy retired couple could pay no federal tax by putting their wealth into real estate, municipal bonds and stock index funds. The income earned from these investments was either tax-free or was cancelled out by deductions and exemptions. The article had a lot of fine points, but it was missing one very important piece. Most wealthy investors have considerable savings stashed away in tax-deferred retirement accounts such as traditional IRAs. The IRS won’t allow the money in these accounts to stay tax-deferred forever. The Tax Man cometh to retirees when Required Minimum Distributions (RMDs) begin, and he never leaves.
It’s difficult to find someone who thinks interest rates will go lower. However, you don’t have to dig far to see that the case for higher rates isn’t as certain as most people believe. I’m not saying interest rates will fall, but there’s certainly a case for that also.
Unconventional success from an investment strategy leads to failure for most investors. The excess gains earned by the early adopters of a new investment idea quickly dissipate as growing crowds become increasingly unsophisticated and push down returns. It doesn’t take long before the average return from the strategy falls well below a simple portfolio of index funds.
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