Stock Market Video
Three Reasons Indexing Is Not All You Need
This Week’s Fortune Cookie
In Case You Missed It
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In this week’s Stock Market Video, I point out the obvious, which is that markets have come roaring back from their January corrections. Earnings season is starting to wind down and I point out a few stocks that have made big moves after reporting strong results. I also have a few stocks that look like good setups for either buying or watch-listing. Click below to watch the video.
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Three Reasons Indexing Is Not All You Need
The financial industry, especially the mutual fund giants that dominate U.S. consumer investing, agrees on one very important thing.
They think you shouldn’t be investing your own money. They give many reasons, but the biggest one is some version of the Efficient Market Hypothesis. The EMH says that everything anyone knows about every stock is already priced in, so the individual investor doesn’t stand a chance of beating the market.
To be fair, the experts don’t just doubt that individual investors can beat the market, they’re also skeptical that professional investors can pull it off.
That’s why—for many experts—the ultimate conservative approach to owning stocks consists of putting your money into a number of passive index mutual funds … and leaving it there. Period.
Passive index mutual funds seek to mimic the performance of whatever index you choose, with the Dow Jones Industrial Average and the S&P 500 among the most popular. And if you follow the standard wisdom, you will salt your retirement money away in these index funds and just leave it there until retirement. The method is simple: Put in money for your whole working life, then start taking it out.
John Bogle, the founder of Vanguard and a high-profile evangelist for index mutual funds, is credited with being a pioneer in index investing, and his aphorism, “Don’t look for the needle, buy the haystack” has the kind of punchy memorability that a good slogan needs.
What gets Bogle’s dander up is the widespread popularity of actively managed mutual funds. And his biggest gripe about them is the high management fees they charge. For many such funds, there is a sales fee just to get them to take your money, then a recurring management fee that’s charged every year. Annual fees can run as high as 2% or more, which makes it even harder to beat the indexes, and those fees are charged even in years when the funds lose money.
Bogle’s preferred solution, the index mutual fund, is quite simple. Managers of such funds don’t have a hugely challenging job; they just buy and hold stocks that will let them match the performance of the index. And because the management of the funds is simple, their fees are far lower.
Personally, I agree with Bogle that passive index mutual funds are preferable to actively managed funds. But I have three reasons for recommending that you not turn over your entire investment nest egg to index mutual funds that are run by a big investment house and forget about it.
Here they are:
John Bogle may be partially right. I’ve known lots of people who don’t have the mental acuity or motivation to pick out their own clothes for the day, much less run their own retirement preparations. But I’m betting that you’re not one of those people.
Truth to tell, I have a very high opinion of people who have the good sense to read Cabot Wealth Advisory. My money’s on you.
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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s Comment: Explaining exactly why we laugh when we read this one-liner is difficult. Humor is like that. But there’s little doubt one reason is that we identify with the statement. Even if we’re comfortable now, we all remember what it was like when we were less comfortable, and we’re all investing to make sure those days don’t return.
Paul’s Comment: Retirement humor often has a dark undertone, and Youngman’s quip summarizes a fear that many face. It’s one thing to wonder about how inflation, illness or another crisis in the stock markets might affect your monthly income. It’s another thing entirely to joke about good retirement meaning name brand cat food rather than generic. Humor always knows where the deep fears lurk.
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 2/24/14—A Reinvention Stock
In this issue, I answer a couple of questions about growth investing risks that are not frequently asked, including one about extreme risk aversion. Stock discussed: Monster Beverage (MNST).
Cabot Wealth Advisory 2/25/14—A New Leg to Chipotle’s Growth Story?
Mike Cintolo, the brains behind Cabot Top Ten Trader, addresses the difficult topic of how to buy growth stocks after big advances have been made. He also finds one stock that he sees as nicely set up. Stock discussed: Chipotle Mexican Grill (CMG).
Cabot Wealth Advisory 2/27/14—Pounce on the Opportunities!
Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor, writes in this issue about how value investing can let you find bargains amid the fluctuations in the market caused by supercomputer-generated trading. Stock discussed: IntercontinentalExchange (ICE).
Have a great weekend,
Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory
