Mutual Funds
Selling stocks and bonds is an old business that has probably impoverished more people than it has enriched. Why? Most people who buy stocks and bonds break the first rule of game-playing: Never get involved in a game of which you don't know the rules. Sure, everyone's heard the rule of how to make money in stocks — buy low, sell high. Only problem is, you can't tell when a stock is high or when it's low. The fact that it went down ten weeks in a row doesn't mean it isn't about to go lower. The fact that it hasn't moved in a year doesn't mean it won't spike next week. Yet, given the chance to guess at an outcome, most people feel up to the challenge, and are willing to give it a go, particularly if there are big profit promised. For more on the urge to guess the future, and the potential dire consequences, see Risk and Reward.
John Bogle, the founder of Vanguard Mutual Funds, was one of the most influential critics of the idea that people can guess the future of stock or bond prices. Relying on the huge pile of statistics that were generated during the twentieth century by active stock exchanges, he calculated what the average rate of return was “for the market as a whole.” That means, he calculated what you would have made or lost if you'd bought, say $100 worth of every stock available for sale on the stock exchange. He then compared that rate of return with the historical returns achieved by professional stock brokers. The results were very embarassing to the brokers — almost all of them did worse than if they'd simply bought every stock they could lay their hands on and left God to sort it out.
He then went further, and really gored the oxen of the professional stock mavens. The real difference between the returns posted by various different brokers was traceable to the difference in how much they charged for their services! This was logical, of course. The more the brokers took in fees, the less there was to invest, and hence, the lower the returns. Many brokers, it turned out, were squandering their investors' monehy by paying big commissions to stock salesmen and advertising agents who would talk about bull markets, guaranteed returns, sure bets and various other euphemisms for “get rich quick.”
Bogle's solution was to change two things about the system:
First, stop trying to pick stocks, and just buy as broad a portfolio as possible, so as to “track the market.” This is called creating an Index Fund — so called because the returns of the fund should provide an “index” to the overall performance of the market as a whole.
Second, stop spending so much money marketing the fund, paying salesmen, and throwing lavish parties for big investors. Focus on the relatively clerical, low cost task of buying and selling stocks so as to make sure the market provides a good current snapshot of the market as a whole.
Bogle achieved his goal, creating the Vanguard family of funds, that spawned thousands of imitators, calling themselves “mutual funds,” and in the process completely changing the securities industry. Unfortunately, the importance of Bogle's message has pretty much worn off among non-professionals, and whoop-de-do marketing gimmicks are as important as they ever were. Although money pours into mutual funds, many don't spend it much more wisely than in the pre-Bogle era.
Accordingly, to speak about the advantages of mutual funds in the abstract is rather unhelpful. Still, you want a general definition, so here it is. A mutual fund is a large ball of cash that is gathered together by a brokerage company, managed by professional investors, with the stated goal of investing the money in accordance with some particular strategy. For example, a mutual fund might be named Woolcutt Value Growth Fund, with $500 Million under the management of Winston Woolcutt III, in order to invest in mid-sized domestic companies that Mr. Woolcutt thinks will grow a lot.
What should you pay attention to in the mutual fund market? First, the size of the fund — really huge funds are sometimes believed to perform less well because managing gazillions of dollars is a big job, and the managers get a little spread thing. Second, the manager — how long have they been managing this fund, and have they made money in the past? Third, what are they investing in? You want to go deeper than “mid-sized domestic companies” — you want to see what's in their portfolio — what stock are they actually buying? Why? Does their strategy make sense?
Mutual funds can be a good idea for ignorant investors for several reasons. It's a lot easier to decide if a fund is likely to do well than it is to predict whether one particular company is going to prosper. It's also easier to get a spread of different stocks, because you will pay one brokerage commission and get some mutual fund shares that reflect ownership interest in a diversified portfolio — so you're likely to survive periods of market volatility without sustaining large losses. To study up on mutual funds, check out some of our suggested reading, including Bogle's book, in http://www.401kinvestor.net/Books_for_Investors Also, you can do a little reading at Morningstar.com, which makes interesting reading and helps you see how fund analysts rank different funds. A beginning investor could do worse than simply buying top-rated funds as ranked by Morningstar and other companies, but if you really want to enjoy this process, try to understand it. That way you're knowledge will grow as your bank account does.
Go to>> Index Funds and ETFs
John Bogle, the founder of Vanguard Mutual Funds, was one of the most influential critics of the idea that people can guess the future of stock or bond prices. Relying on the huge pile of statistics that were generated during the twentieth century by active stock exchanges, he calculated what the average rate of return was “for the market as a whole.” That means, he calculated what you would have made or lost if you'd bought, say $100 worth of every stock available for sale on the stock exchange. He then compared that rate of return with the historical returns achieved by professional stock brokers. The results were very embarassing to the brokers — almost all of them did worse than if they'd simply bought every stock they could lay their hands on and left God to sort it out.
He then went further, and really gored the oxen of the professional stock mavens. The real difference between the returns posted by various different brokers was traceable to the difference in how much they charged for their services! This was logical, of course. The more the brokers took in fees, the less there was to invest, and hence, the lower the returns. Many brokers, it turned out, were squandering their investors' monehy by paying big commissions to stock salesmen and advertising agents who would talk about bull markets, guaranteed returns, sure bets and various other euphemisms for “get rich quick.”
Bogle's solution was to change two things about the system:
First, stop trying to pick stocks, and just buy as broad a portfolio as possible, so as to “track the market.” This is called creating an Index Fund — so called because the returns of the fund should provide an “index” to the overall performance of the market as a whole.
Second, stop spending so much money marketing the fund, paying salesmen, and throwing lavish parties for big investors. Focus on the relatively clerical, low cost task of buying and selling stocks so as to make sure the market provides a good current snapshot of the market as a whole.
Bogle achieved his goal, creating the Vanguard family of funds, that spawned thousands of imitators, calling themselves “mutual funds,” and in the process completely changing the securities industry. Unfortunately, the importance of Bogle's message has pretty much worn off among non-professionals, and whoop-de-do marketing gimmicks are as important as they ever were. Although money pours into mutual funds, many don't spend it much more wisely than in the pre-Bogle era.
Accordingly, to speak about the advantages of mutual funds in the abstract is rather unhelpful. Still, you want a general definition, so here it is. A mutual fund is a large ball of cash that is gathered together by a brokerage company, managed by professional investors, with the stated goal of investing the money in accordance with some particular strategy. For example, a mutual fund might be named Woolcutt Value Growth Fund, with $500 Million under the management of Winston Woolcutt III, in order to invest in mid-sized domestic companies that Mr. Woolcutt thinks will grow a lot.
What should you pay attention to in the mutual fund market? First, the size of the fund — really huge funds are sometimes believed to perform less well because managing gazillions of dollars is a big job, and the managers get a little spread thing. Second, the manager — how long have they been managing this fund, and have they made money in the past? Third, what are they investing in? You want to go deeper than “mid-sized domestic companies” — you want to see what's in their portfolio — what stock are they actually buying? Why? Does their strategy make sense?
Mutual funds can be a good idea for ignorant investors for several reasons. It's a lot easier to decide if a fund is likely to do well than it is to predict whether one particular company is going to prosper. It's also easier to get a spread of different stocks, because you will pay one brokerage commission and get some mutual fund shares that reflect ownership interest in a diversified portfolio — so you're likely to survive periods of market volatility without sustaining large losses. To study up on mutual funds, check out some of our suggested reading, including Bogle's book, in http://www.401kinvestor.net/Books_for_Investors Also, you can do a little reading at Morningstar.com, which makes interesting reading and helps you see how fund analysts rank different funds. A beginning investor could do worse than simply buying top-rated funds as ranked by Morningstar and other companies, but if you really want to enjoy this process, try to understand it. That way you're knowledge will grow as your bank account does.
Go to>> Index Funds and ETFs