I agree with just about everything you said. I’m just saying, that investing is like anything else…you can find “bargains” in active management just like you can with anything else. Most funds are not going to fill the bill, but a few will (like the ones I mentioned, and probably others as well).

I don’t think index funds are all bad. But there are a few funds (like the ones I mentioned) that have consistently beat the S&P 500 over the years.

.75% as an expense ratio is a general rule of thumb. An expense ratio that’s lower than that is better if all other things are equal. But of course, in real life, all other factors are not equal.

One other thing to consider…..when you’re withdrawing from a portfolio, it is possible to slightly underperform the index and still come out ahead. If your fund holds up better in down markets, then your personal rate of return may still beat what the returns of the index. This is why I think low expense balanced funds like the ones I mentioned are a good idea for most people, especially those who don’t enjoy thinking about investing.

For a mutual fund investor, seems to me that the risk is even greater by following (what I call) the medium term performance records. Let’s say some MBA scrub lands a job as a junior fund manager and lucky her/his way into a senior fund manager role a few years down the line. So s/he has a good 5-year record, and it’s all Luck. But the manager has bamboozled her/himself into believing it’s more Skill than Luck. By definition, isn’t it actually riskier to now invest with such a manager, falsely embolded by serendipitous outperformance and rising assets under management? It’s more likely that such an individual will overreach and come back to reality, and a mutual fund investor will have been better off investing with some other lucky young turk who hasn’t yet enjoyed the 5 year lucky streak and thus is not as bold and careless with the delusion of SKill.

Regarding taxes, I happen to like doing them, but I always strive to minimize / simplify the accounting work involved. In my 14 year personal investing career, I’ve always found it more complicated to deal with mutual fund distributions (some short-term, some long-term, not so easy to figure out the 1099). With stocks, it’s much easier for me to track it myself, and I have total control over my taxes. I get to decide when to sell shares, and dividend payouts are generally pretty predictable (current financial environment notwithstanding). Life is simpler and more profitable without mutual funds.

In the mutual fund industry, the managers would much rather be a safe part of the pack than take a chance for their shareholders and try to go against the (industry) grain and outperform. The risk to the managers is that they have an underperforming year when trying to have an outperforming year, and thereby lose all sorts of investors who chase the long-term performance metrics across all available funds (in some sector, for example). So, the risk to the investor is that the longer a manager’s good reputation persists and the larger the fund gets, the more mediocre the performance will be.

I think you understand how mutual fund managers get paid: directly from the expense ratio. They make money by having more *assets under management*. One way to grow assets under management is to proficiently allocate assets that grow. But the easier way is to not underperform one’s peers (or at least not too much) and thereby retain shareholders and attract new shareholders purely on the basis of financial gravitation. People feel safe with the big: big countries, big houses, big cars, big mutual funds. “Fidelity Magellan is so big…the management *must* be doing *something* right.” So all you have to do to make big money as a fund manager is slowly but steadily grow and don’t have any really big down years. You’re bound to get lucky and have an occasional big year. When the indexes are up, managers and marketers are Wild West fast at the trigger to explain how “it’s so great to be invested at a time like this. You can’t afford to take chances when there is so much money to be made in these bull markets.”

It’s pretty clear to me that mutual fund managers (for the most part) do not have their shareholders best interests in mind. Managers want to do quantity, not quality, because it’s so much easier. People are rather susceptible to glossy financial marketing and repetitive presentation of long-term performance stats (I’ve seen performance records as short as 3 years touted as long-term). Folks somehow trust other people with their money more than they trust themselves to learn how to handle their own money. Managers don’t take chances and rarely come close to any index that resembles their stated investment approach. tyger, it’s not just because their expense ratios are over 0.75% (how did you come to anchor yourself on that figure anyway?) — it’s because funds operate on the expense ratio (asserts under management) model at all.

Active mutual fund management is also well known for “window dressing”: near the end of the year, they buy into some position that has done well, just to make it look on the annual report like they are where the profitable action is (or in their case, was).

I may be penny wise and even pound foolish, but the last thing you want to do is come to believe that mutual fund active management has your best interests in mind. For them, any outright financial satisfaction on your part is gravy. Their only concern is *preventing your dissatisfaction*, which I hope you can see leaves them a consider Margin of Mediocrity within which to slightly under- or (on occasion) over-perform some index which you could get at a much lower cost.

For me, if something has complicated tax consequences, I tend to go with the fund. While I enjoy investing, I simply don’t like doing taxes and I’m willing to pay extra management fees to avoid them.

I’m of the opinion that active management can add long term value if expenses are reasonable. The key is to pay expenses well below average (I’d say below .75%…although less than that is definitely better).

Most mutual funds don’t beat the S&P because their expense ratios are too high. If they all kept their expenses to .75% or less, many more of them would beat the index.

@Debbie M - I’m a little bit worried about TIPS when those who pay the inflation adjustment also get to adjust the inflation itself. Now if there was a tip that was indexed to gold or oil..

@Baglady - I know them (theoretically), but I always figured they were more complicated to acquire and deal with in terms of taxes.

@mysticaltyger - Our current budget is: Housing $700 + car(argh) $100 + food $75 + misc. $125. I’d like to cut housing (we have a big unused room) and obviously I’d like to ditch the car. I think I could do it for about $600/month (RV or boat, no car). I actually owned OAKBX at some point, but I was accumulating too many funds. IT was a mess. Of course now I have even more stocks.

@steve - you gotta share you book list at some point (the keepers).

I read a book once: David Dreman; Contrarian Investment Strategies The Next Generation. Absorbing it permanently disabused me of the mutual fund fallacy.

Why not just put your money in a “balanced” mutual fund that invests around 60-65% stocks and 35-40% bonds. These funds came about in the 1930s and were designed to be a person’s only investment plan. They still fill the bill today.

Some of my favorite balanced funds are:

Vanguard Wellington. Has great long term returns and with a cheap .27% expense ratio, it’s hard to go wrong. If you have 100K, you can get the Admiral share class, which has a .15% expense ratio.

Dodge and Cox Balanced: Has been around since 1931 and has a cheap .53% expense ratio and also has great long term returns. This is a team managed fund, so you normally don’t have to worry if a manager leaves like you do with other mutual funds.

T. Rowe Price Capital Appreciation. Has a reasonable expense ratio of .70%. Hasn’t had a losing year since 1990, and at that it was only around 1.5%. Has great long term returns.

Oakmark Equity Income: Has a slightly annoying expense ratio of .83% but it’s 10 year track record puts it in the top 2% of balanced funds. The managers have been there long term.

If you can get into a “load” fund without paying a load…. American Funds Income Fund of America is worth a look. It has pretty smooth returns despite investing a sizable portion of it’s bond portfolio in junk bonds. This fund focuses on yield, (hence the investments in junk bonds), so it does mostly dividend paying stocks and bonds.

Also, if you want a pure bond option.. there’s always Loomis Sayles Bond. This is a “multisector” bond fund. It can invest sizable portions of assets in foreign bonds, as well as junk bonds. This is one of the few bond funds that manages to get capital gains as well as high income. The expense ratio is annoyingly high at .97%. However, if you have 100K, you can get the “institutional” shares for a much more reasonable .66%. The returns on this fund are excellent.