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"The Great Mutual Fund Trap"
Taylor Larimore 02-11-2003, 2:31 PM | Post #79204 | 
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Hi Diehards:
Gary Gensler, former Undersecretary of the Treasury, and Gregory Baer, former Assistant Secretary for Financial Institutions at the U.S. Treasury, have co-authored an excellent book that I have just finished reading. It's titled: "The Great Mutual Fund Trap". Here are excerpts:

"You cannot improve your returns by spending more time or money trying to pick funds or stocks. You can, however, significantly improve your returns by choosing vehicles that offer the lowest possible costs and the greatest tax efficiency."

"With returns corrected for survivorship bias, the average actively managed funds trail the market by about 3 percentage points a year."

"We consider the indexing option a miracle. -- If you had told a Wall Street executive 50 years ago that individual investors would be able to purchase shares in five hundred of the largest U.S. companies at zero commission and with annual management fees of 18 cents per $100 invested, he would have fainted dead away."

"In October 2001, less than two months before Enron declared bankruptcy, 19 of the 22 analysts who covered the stock rated it a "buy."

"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets."

"Every study we have ever seen on the subject shows that the more frequently individual investors trade, the worse they perform."

"The advertisers on CNBC must be operating on the assumption that its viewers will believe just about anything."

"No mutual fund or pension fund manager has ever or will ever appear on CNBC to discuss a stock he or she's going to buy tomorrow."

"The only way for an investor to earn predictably higher returns over time is by taking on more risk."

"Diversification is the free lunch of investing."

"The basic thrust of efficient market theory, is relatively simple and extremely important: Information currently known about a company is reflected in the prices for its bonds and stock."

"Accept the fact that you are unlikley to beat a market where prices are set by the consensus of thousands of professionals and where you have to pay a steep price for every attempt."

"No matter how skillful individual managers become, broad market index funds are going to beat about half of them, even before costs."

"The returns of actively managed funds were 20% to 25% more volatile than the broad market."

"The most likely way for a fund manager to generate a high ranking is to take on additional risk."

"With the exception of index-heavy Vanguard, have you ever seen an advertisement by a fund company that emphasized its expenses? We didn't think so."

"In pursuing market-beating returns, investors often exhaust themselves and their money paying money managers and brokers."

"Consider Money magazine's annual Mutual Fund Guide where you can find the fifty top-performing funds for the preceding year. Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998." (Don't chase performance.)

"As a group load funds actually earn lower average returns than no-load funds, even without taking the load into account."

"The hope of the fund companies and brokers is that you will forget that there are plenty of fund companies like Vanguard and T. Rowe Price that charge no loads and lower fees."

"If you simply buy and hold -- you don't need to read investing magazines, watch financial news networks, subscribe to newsletters, or pay a broker to execute new trades."

"Professional advice may let you sleep better at night. As with most services, thought, the key is how much you pay a planner and what you get for your money."

"As of 9-3-01, the twelve brokerage firms with 5-year performance records average a total cumulative return of 29.6% compared to 62.7% for the S&P 500 Index."

"Hulbert's Financial Digest is the one newsletter we like."

"Hulbert's data show more than 84% of newsletters underperform the market over 5-years. Over 10-years, that number rises to 90%."

"The average newsletter returned less than half of the risk-adjusted Wilshire 5000"

"Overconfidence is one of the central obstacles to escaping the trap of active fund management and stock picking."

Kahneman/Tversy Study: "A loss of $1 is approximately twice as painful to investors as a gain of $1 is pleasant."

"The financial services industry spends billions in advertising to keep investors excited about the prospect of better returns around the corner."

"Many of the costs of investing are practically invisible--you never have to write a check to anyone for fees or commissions."

Daniel Kahneman, winner of the 2001 Nobel Prize in Economic Science: "Asked how he invested his money, he said that he favors index funds."

"You should buy the market as a whole and stop trying to outrun it through active fund management or stock picking."

"Passive investing means accepting the valuation that the market has assigned each stock and not trying to profit from speculation on which of those

Originally posted in thread: 25852
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