Managed funds?

[JohnnyJimJams]

Hi all,

I'm a 31 year old pauper

I haven't been interested in personal finance up until I found my new religion of personal development approx 2 years ago.

I've managed to use the debt snowball method and am now debt free.

I've been looking at managed funds through my bank....

They tell me that 14%/annum is reasonable, and that I would have to start with $5000 and continually add a set amount each month for 5 years.

I could write a book about what I don't know about finances What questions could I ask, and what are your recommendations?

[ahimel]

Johnny...

Please forgive my attacking your very premise, but why are you looking at managed funds? If you have a very specific benefit that you believe you can get out of your bank's managed fund, by all means go for it. But in general, I would recommend unmanaged index funds over just about any managed fund.

(Definition: an unmanaged index fund is one where they select a fixed list of stocks/bonds, buy them, and ignore them. Usually the bank doesn't even select them, they just use a pre-defined list, like the 30 stocks that make up the Dow Jones Industrial Average. The stocks you hold only changes if the DJIA list changes.)

1. Index funds are much cheaper Since there's practically no effort involved (Look up stocks. Buy stocks. Drink coffee) the management fees are significantly lower. I don't have a prospectus on me, but my memory says that a .5% annual fee would be quite normal, as opposed to the 1-3% for a managed fund.
2. Index funds usually do better People can't consistantly pick stocks better than the market. If the market goes up, financial advisors and fund managers do well. If it goes down, they do poorly. Monkeys throwing darts beat 75% of managed funds. Fund managers with brain damage do better than 75% of their undamanged (still employed) peers. You could just buy "the market" and do as well or better in the case of 75% of the funds.
3. Index funds are as easy as it gets Yes, 25% of the funds beat the market, but for the time and effort it would take you to figure out who they are, you might as well put in the time to pick your own stocks. Index funds are the lazy man's way to still do at least as well as the market does.

Also, in the US at least, I've found very few banks that offer a good deal on stock-market-like investments. I would seriously consider looking into at least one or two financial advisors, and seeing what kind of deal they can make you.

Is 14%/year supposed to be your return? (I'm hoping it's not your expense ratio!) It depends on what you're investing in, but for a US IRA invested fairly aggressively, that would be on the high end of reasonable; the S&P 500 (another one of those index things) has done 12%-15% per year on average. So 14 is a marketing gimmick, but conforms to truth in advertising.

Congratulations on being debt-free! And welcome to the next step of wealth building!

(PS -- I was a licensed financial advisor before I quit to become an unemployed personal devleopmentalist. My friends like to call me before they invest in something, just to make sure they're not missing something basic. If you'd like to PM me to do the same thing, feel free.)

[Richard_Todd]

Originally Posted by ahimel

But in general, I would recommend unmanaged index funds over just about any managed fund.

I'll second that.

[Alvin]

Hi Ahimel,

I've done a little looking into index funds but it seems that a lot of them require a big amount to buy-in; the Vanguard 500 lists a starting investment of $5000 for eg.

Are there solutions for people like me without a big amount of cash but would like to start early?

P.S. I don't live in the US by the way.

[JohnnyJimJams]

Originally Posted by ahimel

Johnny...

Please forgive my attacking your very premise, but why are you looking at managed funds? If you have a very specific benefit that you believe you can get out of your bank's managed fund, by all means go for it. But in general, I would recommend unmanaged index funds over just about any managed fund.

(Definition: an unmanaged index fund is one where they select a fixed list of stocks/bonds, buy them, and ignore them. Usually the bank doesn't even select them, they just use a pre-defined list, like the 30 stocks that make up the Dow Jones Industrial Average. The stocks you hold only changes if the DJIA list changes.)

1. Index funds are much cheaper Since there's practically no effort involved (Look up stocks. Buy stocks. Drink coffee) the management fees are significantly lower. I don't have a prospectus on me, but my memory says that a .5% annual fee would be quite normal, as opposed to the 1-3% for a managed fund.
2. Index funds usually do better People can't consistantly pick stocks better than the market. If the market goes up, financial advisors and fund managers do well. If it goes down, they do poorly. Monkeys throwing darts beat 75% of managed funds. Fund managers with brain damage do better than 75% of their undamanged (still employed) peers. You could just buy "the market" and do as well or better in the case of 75% of the funds.
3. Index funds are as easy as it gets Yes, 25% of the funds beat the market, but for the time and effort it would take you to figure out who they are, you might as well put in the time to pick your own stocks. Index funds are the lazy man's way to still do at least as well as the market does.

Also, in the US at least, I've found very few banks that offer a good deal on stock-market-like investments. I would seriously consider looking into at least one or two financial advisors, and seeing what kind of deal they can make you.

Is 14%/year supposed to be your return? (I'm hoping it's not your expense ratio!) It depends on what you're investing in, but for a US IRA invested fairly aggressively, that would be on the high end of reasonable; the S&P 500 (another one of those index things) has done 12%-15% per year on average. So 14 is a marketing gimmick, but conforms to truth in advertising.

Congratulations on being debt-free! And welcome to the next step of wealth building!

(PS -- I was a licensed financial advisor before I quit to become an unemployed personal devleopmentalist. My friends like to call me before they invest in something, just to make sure they're not missing something basic. If you'd like to PM me to do the same thing, feel free.)

1) Great post.

2) My ego can withstand you questioning my lack of knowledge in this area, if it means a bathtub full of money to bathe in.

3) What would be the first step in getting started using indexed funds. Is this something that I would do through my bank, a financial adviser, or another financial instituition?

4) 14% was a word of mouth figure that a friend told me yesterday, I assumed that it was a marketing figure, thats the reason I posted here.

[ahimel]

Originally Posted by Alvin

I've done a little looking into index funds but it seems that a lot of them require a big amount to buy-in; the Vanguard 500 lists a starting investment of $5000 for eg.

Are there solutions for people like me without a big amount of cash but would like to start early?

Originally Posted by JohnnyJimJams

3) What would be the first step in getting started using indexed funds. Is this something that I would do through my bank, a financial adviser, or another financial instituition?

You can check with your bank; they should have a list available of all the funds they can offer you. See if any of them have names like blah-blah-blah index fund or Unmanged growth fund.

Otherwise, check with a financial advisor. Tell them that you've finished paying off debt and want to start investing. They can find you a mutual fund company that offers index fund options. (Educate yourself a bit on what options your country offers; the US offers HUGE tax savings if you're willing to commit to saving this money for the long-term, like for a first home or if you promise not to touch it until you're 60. If your country has something similar, take advantage.)

It's true that most fund companies have minimum investment requirements, but they're usually happy to find some way to take your money. Usually they ADVERTISE a minimum initial investment, but they also will take a minimum monthly investment. Van Kampen, for example, won't accept an account smaller than $25,000 unless you set up an autopayment to contribute at least $50/month -- then you can start up an account with nothing.

I don't know specifically that non-US companies would do this, but it seems logical. Or maybe you could start an account with a US company?

[thadroe]

I think index funds can be good if you don't know what else to do or how to analyze a managed fund.

However.....in markets like small cap, mid cap, and international, managed funds statistically perform much better as those markets are far less efficient and it's easier for fund managers to capitalize on those inefficiencies. For that reason alone, I would not consider index funds the best option for those areas.

Large cap can be a closer call performance-wise over the long term, but there are still plenty of good reasons to go with a managed fund in that market at well. For one thing, you can often get the same, if not slightly better performance with less risk.

The reason for this is that many indices, especially the S&P 500, tend to expose investors to unnecessary risk by overweighting certain sectors at inappropriate times. The perfect example of this is the .com boom and subsequent crash in 2000/2001. The sector weightings of the S&P 500 are determined by a committee, so it's not entirely "unmanaged" in a pure sense. By following their own directive to represent "the market" as a whole, they heavily increased their weightings in tech and .com stocks at the time those industries were peaking out, causing any investor in the S&P 500 to be overweighted in a sector that was bubbling and about to pop. The end result was that many index investors saw a substantial decline in value. Many managed funds had a substantial decline as well, but there were many that didn't.

Anyway, my point is that there is definitely added value in managed funds, you just have to be selective about which ones you pick. Some of the key factors to zero in on are picking managed funds that have a nice long track record of good performance, but the critical factor is looking for ones that tend to perform well each specific year, not just overall annualized returns..they may have been just lucky one year if you are only looking at the annualized returns. Every fund has it's bad years, but look for ones that consistently beat their peers and are in the top 25-50 percentile year after year. In addition to that, look for funds that have a lower "beta" than the index they are being measured against.

Now, if that all sounds like gobbledygook, you don't want to bother with the research, or you just don't care and think index funds sound like a good idea..that's fine and still not a huge deal..but in that case, I'd say you would be best off searching for index funds that use what's called an "equal weighting" strategy. That simply means they will invest in the same stocks contained in an index like the S&P 500, but they will give each stock an equal weight in the fund, which tends to reduce your overall volatility and risk. You can easily do a search on Google and find index funds that do this.

Just my $.02....compounded

[Fusebox]

Hey JJJ (easier to write and short ),

I started saving last year in Oct. Basically wanted to find out about managed funds, first thing I did was talk to a financial advisor, managed to find one close to my home via the BT website. (Also look up Count Financial www.count.com.au/).

At the time I wasnt aware of index funds, but I knew I wanted to invest in longterm stocks as a way of building wealth. So I was shown options as to what my goals were etc, and a portfolio was designed. Since then Ive regularly been putting money away into the managed fund.

If you do see a financial advisor(s) make sure you also ask about index funds.

Im going to make an effort to play around with value investing over 2007 to see if im any good at it, and then do it for real in 2008.

[Cassie]

Originally Posted by thadroe

Just my $.02....compounded

Oh, haha. I got such a kick out of reading that.