Indexing dead according to popular financial magazine?

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ronin
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Indexing dead according to popular financial magazine?

Post by ronin » Thu Apr 23, 2009 8:23 am

I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times. I realize that to generalize while only speaking short term is not wise, however others have noted that with the major indexes having essentially covered little ground over even the recent 10 year period seems a bit more eye catching.

I am an avid index fund user through Vanguard and am not going to be easily swayed by popular press articles such as this, but are there any merits to this or at least caveats to consider?

I'm new to the community but very impressed so far!

Thanks!

Ron
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Re: Indexing dead according to popular financial magazine?

Post by Ron » Thu Apr 23, 2009 8:27 am

ronin wrote:I am an avid index fund user through Vanguard and am not going to be easily swayed by popular press articles such as this...


Respectfully, have you not answered your own question?

Over many years, I've been exposed to "theory" that contrasted in what I belived in (in my investments). I've learned that there is only one "voice" that counts - me :lol: ...

Sure, you can listen to a lot of folks (including me, on this forum), but when it gets down to it, only you know your life, your risk assessment, and what you feel comfortable with (hopefully for the long term). That's all that really counts, IMHO.

- Ron

strafe
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Post by strafe » Thu Apr 23, 2009 8:30 am

Per yesterday's WSJ:
http://online.wsj.com/article/SB124036618955342011.html

Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time....The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, those numbers are similar to the previous five-year cycle.

plex
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Post by plex » Thu Apr 23, 2009 8:33 am

I am pretty sure you already know the answer, but there really are no caveats, everything has performed "badly," so it is very easy for an artcile to say anything is doing "poorly" right now. That really has nothing to do with which approach has done the least poorly though.

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Re: Indexing dead according to popular financial magazine?

Post by 3CT_Paddler » Thu Apr 23, 2009 8:54 am

ronin wrote:I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times.


Maybe this is kind of like that Death of Equities magazine cover from 30 years ago I keep hearing about :D The future has never looked so bright for indexing (once this mess of a financial system gets worked out)! I think Smart Money makes a lot more coinage by touting what the new hot mutual fund is doing compared with preaching some boring simple indexing strategy. I would not really look to them as an authority on the value of indexing.

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Re: Indexing dead according to popular financial magazine?

Post by Tramper Al » Thu Apr 23, 2009 9:23 am

3CT_Paddler wrote:I think Smart Money makes a lot more coinage by touting what the new hot mutual fund is doing compared with preaching some boring simple indexing strategy.

Yes, I think this magazines title comes from a construct in which the smart money knows where and when to invest. For me to favor indexing as the vehicle of choice for stocks essentially requires a belief that at least 1) I am not smart in this way, or perhaps more correctly, that 2) nobody is or can be.

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Re: Indexing dead according to popular financial magazine?

Post by Rodc » Thu Apr 23, 2009 9:25 am

3CT_Paddler wrote:
ronin wrote:I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times.


Maybe this is kind of like that Death of Equities magazine cover from 30 years ago I keep hearing about :D The future has never looked so bright for indexing (once this mess of a financial system gets worked out)! I think Smart Money makes a lot more coinage by touting what the new hot mutual fund is doing compared with preaching some boring simple indexing strategy. I would not really look to them as an authority on the value of indexing.


Well, it seems to me that unlike the market where great pessimism about stocks portends better returns down the road, whether there is pessimism about indexing or not does not mean anything. Only in the very extreme case where virtually everyone indexed would it matter (and it would be bad for indexing).

What matters in the long run is valuations (though generally not in the short run) and the popularity of indexing would seem to be independent of valuations.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Indexing dead according to popular financial magazine?

Post by DiscoBunny1979 » Thu Apr 23, 2009 9:25 am

3CT_Paddler wrote:
ronin wrote:I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times.


Maybe this is kind of like that Death of Equities magazine cover from 30 years ago I keep hearing about :D The future has never looked so bright for indexing (once this mess of a financial system gets worked out)! I think Smart Money makes a lot more coinage by touting what the new hot mutual fund is doing compared with preaching some boring simple indexing strategy. I would not really look to them as an authority on the value of indexing.


---------------

Doesn't the success of Index investing rely on the majority of folks owning stocks to not index? In other words if everyone indexed, how would stocks move higher?

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Re: Indexing dead according to popular financial magazine?

Post by btownguy » Thu Apr 23, 2009 9:35 am

ronin wrote:the major indexes having essentially covered little ground over even the recent 10 year period


Seems to me that this reinforces the fact that we should be invested in the indexes. As prices go down, expected returns go up.

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Post by FinanceGeek » Thu Apr 23, 2009 9:35 am

Indexing is dead, long live indexing!

tj-longterm
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Re: Indexing dead according to popular financial magazine?

Post by tj-longterm » Thu Apr 23, 2009 9:41 am

DiscoBunny1979 wrote:Doesn't the success of Index investing rely on the majority of folks owning stocks to not index? In other words if everyone indexed, how would stocks move higher?


I've repeatedly heard people assert or ask this question.

Not only does the "success" of index investing have nothing to do with the ratio of index investors to non-index investors, there will never ever be a situation where "everyone indexed". Further, you can't move from theorizing about the impossible situation where "everyone" indexes to any conclusions about what one should do now.

In other words, this assertion is wrong in theory, and unrelated to reality.

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Taylor Larimore
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Fiction and Fact

Post by Taylor Larimore » Thu Apr 23, 2009 9:57 am

"Indexing dead according to popular financial magazine?"

Let's look at the facts:

􀂉 Over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.

􀂉 The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.

􀂉 Benchmark indices outperformed a majority of actively managed fixed income funds in all categories over a five-year horizon. Five year benchmark shortfall ranges from 2-3% per annum for municipal bond funds to 1-5% per annum for investment grade bond funds.

􀂉 The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past five years.

http://www2.standardandpoors.com/spf/pd ... d_2008.pdf
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Re: Indexing dead according to popular financial magazine?

Post by 3CT_Paddler » Thu Apr 23, 2009 10:48 am

Rodc wrote:
3CT_Paddler wrote:
ronin wrote:I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times.


Maybe this is kind of like that Death of Equities magazine cover from 30 years ago I keep hearing about :D The future has never looked so bright for indexing (once this mess of a financial system gets worked out)! I think Smart Money makes a lot more coinage by touting what the new hot mutual fund is doing compared with preaching some boring simple indexing strategy. I would not really look to them as an authority on the value of indexing.


Well, it seems to me that unlike the market where great pessimism about stocks portends better returns down the road, whether there is pessimism about indexing or not does not mean anything. Only in the very extreme case where virtually everyone indexed would it matter (and it would be bad for indexing).

What matters in the long run is valuations (though generally not in the short run) and the popularity of indexing would seem to be independent of valuations.


I agree whether or not there is pessimism about indexing means nothing about its returns. What I should have said is looking forward the possibility for better returns in the stock market went up with our recent bear woes. And as an index investor we are in a great spot to capture those future promising returns. Now maybe it might take longer than we wish, but the future ten to twenty years from now is bright.

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DiscoBunny1979
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Re: Indexing dead according to popular financial magazine?

Post by DiscoBunny1979 » Thu Apr 23, 2009 11:10 am

tj-longterm wrote:
DiscoBunny1979 wrote:Doesn't the success of Index investing rely on the majority of folks owning stocks to not index? In other words if everyone indexed, how would stocks move higher?


I've repeatedly heard people assert or ask this question.

Not only does the "success" of index investing have nothing to do with the ratio of index investors to non-index investors, there will never ever be a situation where "everyone indexed". Further, you can't move from theorizing about the impossible situation where "everyone" indexes to any conclusions about what one should do now.

In other words, this assertion is wrong in theory, and unrelated to reality.


----------------------

Let's see. . . the success of index investing has nothing to do with the ratio of Index investors versus non-index investors . . . BUT it's impossible that everyone will index. That's MY POINT! You've just pointed out an impossible ratio - 100%. You've stated that it's impossible for everyone to index. Therefore, what is the current % of the combined total of all OUTSTANDING STOCK of every existing company that is Indexed? We might be at some kind of max ratio for Indexing as it is - the amount of shares that are indexed versus the amount of shares that aren't.

Not all stock available can be indexed and not all folks that buy stocks will want to index. Since supply and demand moves stock prices, it's more the folks that buy stock outside of Index Funds that move those prices and therefore everyone can not index......or else the Index can not move beyond current levels.

Show me where Index Funds are market makers and propel stocks like Apple to yearly highs. They don't . . . Index Funds are passive - expecting other people to do the work for them.

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Re: Indexing dead according to popular financial magazine?

Post by saurabhec » Thu Apr 23, 2009 11:41 am

ronin wrote:I recently read an article in Smart Money suggesting that Indexing may not be as compelling given current times. I realize that to generalize while only speaking short term is not wise, however others have noted that with the major indexes having essentially covered little ground over even the recent 10 year period seems a bit more eye catching.

I am an avid index fund user through Vanguard and am not going to be easily swayed by popular press articles such as this, but are there any merits to this or at least caveats to consider?

I'm new to the community but very impressed so far!

Thanks!


The underlying rationale for indexing is based on simple arithmetic. Let us take the entire group of actively managed funds that focus on US equities. As a group, some will outperform, some will underperform, but in aggregate the sum will end up being equal to the performance of the market. However, since their fees are larger, they will as a group underperform after management fees. They tend to be less tax efficient as well, so in a taxable account they will underperform even more.

So you can do better than the average actively managed fund by holding the index. Even if you could have the skill to identify an outperforming manager, there is a lot of evidence showing that the outperformance in temporary. So be ready to pick the new outperformers every year or two. What is the level of your due diligence that assures you that you can pick the outperformers? Have you interviewed the managers you have chosen? Have you analyzed their historical record using sophisticated statistics?

So you see that the hurdle of picking a good actively managed fund you and buy and hold is very hard.

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indexing

Post by pkcrafter » Thu Apr 23, 2009 2:09 pm

Dumb article. I was going to write a post noting how many posters on active fund forums are talking up indexing. Of course people use active funds for the specific purpose of beating the index. Many investors had high and unrealistic expectations of what managers can do. When their favorite funds went down, they suddenly saw the folly of their reasoning.

Furthermore, if anything, this is a time when evaluating individual stocks is extremely iffy. What information can be trusted? Not to mention so much new information is appearing everyday (surprises) that the whole process is a waste of time.

Oddly enough, the turmoil the market is now in creates inefficiency. This type of inefficiency doesn't produce exploitable opportunity though, because no one knows what other information is out there not available to market participants. The conclusion must be that it has to be a fair and reasonably efficient market when it comes to everyone knowing all available information for the market to function properly. Hidden information known only to some can destroy the free market.



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Re: Indexing dead according to popular financial magazine?

Post by runthetrails » Thu Apr 23, 2009 2:53 pm

DiscoBunny1979 wrote:Doesn't the success of Index investing rely on the majority of folks owning stocks to not index? In other words if everyone indexed, how would stocks move higher?



IANAE but it seems to me that there is some equilibrium point below 100% indexing where inefficiencies will exist, and there is therefore incentive for market makers to make active trading decisions. As a result, 1) the market is always likely to have market makers and 2) the index will tend towards the efficient.

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Re: Fiction and Fact

Post by freedomfunds » Thu Apr 23, 2009 6:04 pm

Taylor Larimore wrote:"Indexing dead according to popular financial magazine?"

Let's look at the facts:

􀂉 Over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.

􀂉 The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.

􀂉 Benchmark indices outperformed a majority of actively managed fixed income funds in all categories over a five-year horizon. Five year benchmark shortfall ranges from 2-3% per annum for municipal bond funds to 1-5% per annum for investment grade bond funds.

􀂉 The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past five years.

http://www2.standardandpoors.com/spf/pd ... d_2008.pdf


Quoting a study funded by Standard and Poors touting their own indices is laughable.

The problem is many companies, and some writers, have invested heavily in supporting the supremacy of indexing, while ignoring core facts from third party sources like Morningstar.

THE SP 500 has lost to about 56 % of large cap blend funds in the last decade.
Index choice matters. | | Valuations matter even more.

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Post by gameovah05 » Thu Apr 23, 2009 6:07 pm

Freedomfunds,

The S&P 500 has lost to about 56%. That puts them pretty much right in the middle.

My question to you is how do you know which of the 56% will keep up their superior performance? How do you even begin to pick an active fund?

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Post by Rodc » Thu Apr 23, 2009 6:13 pm

THE SP 500 has lost to about 56 % of large cap blend funds in the last decade.


IMHO, you really should fold in how much money people have put in each fund as if the funds doing well are small few are getting any benefit while if large many are. Best is too look at an XIRR type calculation.

You also have to fold in the funds that have folded.

Morningstar's methodology falls far short.

Precisely what a decent analysis would show I don't know, but M* hasn't done it.

FWIW: TSM is at 33 and 38 over 5 and 10 years, by the same flawed analysis. :roll:
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by freedomfunds » Thu Apr 23, 2009 6:23 pm

gameovah05 wrote:Freedomfunds,

The S&P 500 has lost to about 56%. That puts them pretty much right in the middle.

My question to you is how do you know which of the 56% will keep up their superior performance? How do you even begin to pick an active fund?


Every active fund has a hurdle rate, their expense ratio. The more the expense ratio, the longer the hurdle. I would avoid active funds with fees more than .8 percent, and look at funds with long-term managers.

Vanguard's active funds are good examples.
Index choice matters. | | Valuations matter even more.

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Post by freedomfunds » Thu Apr 23, 2009 6:24 pm

Rodc wrote:
THE SP 500 has lost to about 56 % of large cap blend funds in the last decade.


IMHO, you really should fold in how much money people have put in each fund as if the funds doing well are small few are getting any benefit while if large many are. Best is too look at an XIRR type calculation.

You also have to fold in the funds that have folded.

Morningstar's methodology falls far short.

Precisely what a decent analysis would show I don't know, but M* hasn't done it.

FWIW: TSM is at 33 and 38 over 5 and 10 years, by the same flawed analysis. :roll:


TSM and the 500 vanguard index fund were both rated in the Large Blend category. Since TSM has some mid/small cap mixed into it, (which performed better in the last rolling decade) is why TSM has the rank it has.
Index choice matters. | | Valuations matter even more.

keniles
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index funds

Post by keniles » Thu Apr 23, 2009 6:28 pm

We like index funds as a core in our portfolio. Financial talk comes in many varied forms and thoughts. Sometimes something may catch my eye or ear, and I investigate best I can. This statement which is so definite-like, I just pay absolutely no attention to it at all. Thanks, keniles

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Post by peter71 » Thu Apr 23, 2009 6:32 pm

freedomfunds wrote:
Rodc wrote:
THE SP 500 has lost to about 56 % of large cap blend funds in the last decade.


IMHO, you really should fold in how much money people have put in each fund as if the funds doing well are small few are getting any benefit while if large many are. Best is too look at an XIRR type calculation.

You also have to fold in the funds that have folded.

Morningstar's methodology falls far short.

Precisely what a decent analysis would show I don't know, but M* hasn't done it.

FWIW: TSM is at 33 and 38 over 5 and 10 years, by the same flawed analysis. :roll:


TSM and the 500 vanguard index fund were both rated in the Large Blend category. Since TSM has some mid/small cap mixed into it, (which performed better in the last rolling decade) is why TSM has the rank it has.


Hmm, but that raises the question of whether some of the OTHER funds that beat VFINX also had a little small mixed in . . .

I don't think there's any one ideal performance stat out there and I certainly think you could do worse than throwing darts at a list of highly-diversified, low-cost active funds, but I also agree that that's probably not what most people do . . . I don't know if folks have gotten into "investor returns" yet but CGMFX is a great example of a high performing (16.72% 10-year total return) highly-advertised fund that's at rock bottom (-27.91% 10-year investor return) :D

Rodc
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Post by Rodc » Thu Apr 23, 2009 6:37 pm

freedomfunds wrote:
Rodc wrote:
THE SP 500 has lost to about 56 % of large cap blend funds in the last decade.


IMHO, you really should fold in how much money people have put in each fund as if the funds doing well are small few are getting any benefit while if large many are. Best is too look at an XIRR type calculation.

You also have to fold in the funds that have folded.

Morningstar's methodology falls far short.

Precisely what a decent analysis would show I don't know, but M* hasn't done it.

FWIW: TSM is at 33 and 38 over 5 and 10 years, by the same flawed analysis. :roll:


TSM and the 500 vanguard index fund were both rated in the Large Blend category. Since TSM has some mid/small cap mixed into it, (which performed better in the last rolling decade) is why TSM has the rank it has.


Likely true. I used TSM as it is a more pure market index fund, not a sector and not built by committee.

I guess this is just goes to show M* methodologies are not very good if you are claiming they used a poor benchmark.

It does beg the question: just how far from pure large blend can you be and still be in the comparison? If the funds beating the S&P 500 are classified as large blend, but have an average market cap smaller than the S&P 500, well then it was not active management that won, it was a small tilt that won. You can get that really cheap by buying TSM, adding Extended Market to S&P 500, etc.

If fact, as I understand it, that is the primary way most active funds that "out perform" do so, they tilt and then benchmark against an untilted index. This is an especially classic tactic for selling "enhanced index funds".

PS: :) While getting the kidlets out of the bath I see Peter beat me to it!
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Stonebr » Thu Apr 23, 2009 7:58 pm

Don't kid yourself about Morningstar. They are hardly an objective source for fair treatment of index funds given that their entire business model is based on rating actively managed funds. They do a great job at it, but keep in mind that the brokers/consultants/banks/insurance companies are their biggest source of paying subscribers. These are the people that put you in high-ER 401k plans. That's just the audience that wants to hear "56% of blend funds beat the index." They'll never ask: Did Morningstar mention that it's a totally meaningless isolated factoid unless it persists for a long series of rolling ten year periods? Oh, and what's special about 10 years? Why not 11? What are the stats for 11 years? Or 7.66 years? Why blend funds only? Why not include all large cap funds? After all most of them use the SP500 as a benchmark even if they pursue a growth or value style. How about adjusting for taxes? Do 56% still beat the index in non-sheltered accounts?

How did Morningstar do picking them out back in 1999? How many of the 56% were rated 4 or 5 stars? Let's see, 10 years ago it was Janus, Van Waggoner, Seligman Tech, those idiotic Internet Funds -- all five stars. Whatever happened to AIM Constipation? AIM Weinbarrel? Berger? (I'll take mine with cheese.) More five star funds from 10 years ago.

What counts is persistence, and the persistent (and annoying to Morningstar and its paying subscribers) fact is that this 10 year period with 56% blends beating the index is the exception rather than the rule. This, journalistically, falls into the "man bites dog" category. It's news all right, but I won't bet the farm on it lasting more than a month or two.

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Re: Indexing dead according to popular financial magazine?

Post by avalpert » Thu Apr 23, 2009 9:48 pm

DiscoBunny1979 wrote:Let's see. . . the success of index investing has nothing to do with the ratio of Index investors versus non-index investors . . . BUT it's impossible that everyone will index. That's MY POINT!


This strawman is just not true - of course it is possible (not likely mind you) that everybody would index. There is no metaphysical, financial, or mechanical reason why it couldn't happen - there may be psychological and economic reasons why it is unlikely to happen.

Not all stock available can be indexed


Why not? If all purchasers in the market only wnated to buy accorsing to an index than all stock available will be inexed.

Since supply and demand moves stock prices, it's more the folks that buy stock outside of Index Funds that move those prices and therefore everyone can not index ......or else the Index can not move beyond current levels.


This is not a string of logic - if all people who demanded stocks did so via an index than when those people wanted to sell the index (and there was someone who wanted to buy it) each stock price in the index would adjust to where the seller and buyer reached agreement on value. The only way your conclusion would be true is if there was noone willing to buy or sell - that would require not just that everyone was a buy and hold indexer but that they were all on the same investment and withdrawl horizon.


Index Funds are passive - expecting other people to do the work for them.


This statement is the silliest of them all, they don't expect people to do work for them any more than active buyers do - the people they both expect to do work for them are those in the companies whose stocks they own in making the value fo the asset appreciate.

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Post by zeep » Thu Apr 23, 2009 9:51 pm

Smart Money exists to sell ads and subscriptions, and has to run a steady diet of "Ten Stocks to Own NOW!"

It's hard to sell advertisers and subscribers on a passive set-it-and-forget-it strategy, because then readers aren't interested in what their advertisers are selling.

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Post by gavinman » Fri Apr 24, 2009 9:17 am

I read that Smart Money article also. It reminded of another post on this board.

The article said that active managed funds usually did better during the recovery. While that may be true they also lost more during the decline so it seems to be a wash.

kuttolas
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Index Funds have been good for me so far..

Post by kuttolas » Fri Apr 24, 2009 3:59 pm

I started investing for the first time in my 401(k) from Sep 2008, The only contribution I made in my 401(k) is to an S&P 500 index fund from Morgan Stanley. I just looked at the online statements and found out that my to date returns are -2.96%. Although I have lost money, I can't imagine any other mutual fund being any better than that. This has reinforced my belief in Index Investing more than anything else.

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Karl
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Post by Karl » Sat Apr 25, 2009 11:58 pm

These financial rags are really desperate for stories I think.

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