Personal Finance Roundup

The Index Funds Win Again [NY Times]
“After fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund.”
5 Ways to Get a Better Deal on a New Car [Smart Money] “To get the best deal on the lot, follow these tips.”
5 steps to rescue your retirement [CNN Money] “These five strategies will help repair the cracks in your portfolio and make sure your money lasts as long as you do.”
Cheap Decorating: Three Simple Hacks for Style on a Dime [Wise Bread] “Here are three easy and cheap decorating ideas to add unexpected sass and style.”
Certified used car worth more money [Bankrate] “A factory-certified preowned plan can add as much as 5 percent to the selling price of a used vehicle. You have to decide how much money more peace of mind is worth to you.”

FREE MONEY FINANCE (Photo: frankieleon)

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  1. gttim says:

    Not only is it extremely rare for an actively managed fund or hedge fund to do better than a simple index fund, it is extremely rare for one to do better than the stock market as a whole over a long period of time, even excluding fees. The random walk theory states that flipping a coin to buy or sell stocks is just as good as almost all fund manager’s decisions.

    • humphrmi says:

      @gttim: True and false, it depends on how you invest.

      Some research was done recently on how funds advertise their historical returns, and how people use that information to pick funds. What this research found (and unfortunately, I can’t find the link right now) is that there is a fallacy that a constantly increasing-in-value fund is the best investment for a particular type of investor, that is the type who socks a certain amount away in a fund every month (i.e. 401k investors.) In the research, what they found is that funds that swing wildly – high peaks and low drops – actually provide better returns over a period of time to investors who put new money into the fund every month.

      The reason? because monthly investors are buying more shares in the valleys (so to speak) that later become more valuable at the peaks. Buying at the peaks, of course, means that you have less shares and those lose value in the valleys, but for long term investors that doesn’t matter. So the more valleys there are, the more shares the long-term monthly investor accrues, and (assuming of course that the fund doesn’t bust) the more value long term.

      What does this have to do with your comment? Well, again, depending on the investor behavior, even a fund that under performs the stock market as a whole can way outperform it on a long-term return basis if it has more volatility (peaks and valleys) than the market as a whole over the life of the investment.

    • ADismalScience says:

      @gttim:

      Random walk theory, and the attendant EHM/Brownian motion CAPM models they’re based on, are absolutely 100% invalidated by the current crisis. You have to make false assumptions for that to be true. Plus, don’t buy into a study based on something this synthetic:

      Mr. Kritzman devised an elaborate method to take such contingencies into account. Then he calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10 percent, an actively managed mutual fund with an annualized return of 13.5 percent and a hedge fund with an annualized return of 19 percent. The volatility of the three funds’ returns – along with their turnover rates, transaction fees and management and performance fees – was based on what he determined to be industry averages.

      They say it’s “complicated,” but I guarantee it’s not “complicated” enough to accurately replicate the actual markets these funds operate in.

  2. buckfutt says:

    The bit in the CNN Money article about considering “other sources of income” in retirement planning is spectacularly bad advice. Nobody under 50 (and possible 5-10 years older than that, given how much the federal deficit just shot up) should be planning on getting much of anything out of Social Security, and even if you do work for a company with a traditional pension plan, betting that company will be around for the rest of your life is incredibly naive.

    Consider it gravy if you ever collect any of the above, but counting on either Social Security or a traditional pension for your income is idiotic. Assume you’ll get neither one, and you’ll be much safer in the long run.

  3. johnfrombrooklyn says:

    Actually almost all of us under 50 can count on social security. We paid into it. We’ll get something back. Unfortunately we’ll be living in times of huge inflation because the government will have to keep printing more and more money to pay for these services.