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It's precisely because of the administrative costs and transaction costs that the managed mutual funds are a bad idea: They don't outperform, in the long run, i
by hibikir 11y ago
It's precisely because of the administrative costs and transaction costs that the managed mutual funds are a bad idea: They don't outperform, in the long run, if just because their transaction costs.
That's really the point: An unsophisticated investor should go with index funds over the alternatives. To beat the market regularly, you need non-public information or insight, and the market is large enough that having said insight consistently is something limited to the highly connected.
Your argument against index funds, from a market perspective, is really more about putting all that money in large cap indices. Taking index funds to their conclusion, the ideal situation would be to use broader indices. Startups will still have to deal with venture capitalists, but that's for good reason: High risk, high reward investments aren't exactly what your typical index fund investor is interested in.
- bcg1 11y agoYou make a good point, I really was only considering major large cap indices. I assume this is what most people mean when they talk about "index funds". I'm not really against index funds per se, I actually think they are a great way to invest if you identify a trend in a particular sector. And truthfully, I'm far from a trained financial expert, I'm just some dumb hacker that is rubbed the wrong way by the type of advice I outlined in my above comment.
- qdog 11y agoI'm rubbed wrong by the people who present at "Brown Bag Retirement Advice Lunch Talks" and want me to buy into their managed funds. The index funds have overhead in the range of .02-.5% for the most part. The managed funds are largely 1.5% and I've seen some that charge as much as 2.5%! I'll let you do the math, but it's very hard to choose a managed fund that will outperform after fees vs. S&P 500 from say Vanguard. Most retirement accounts also don't allow individual stock purchases (at least mine doesn't), so the options are fairly limited for most people.
- digikata 11y agoIf you change jobs, one can always roll over 401k accounts to Individual Retirement Accounts instead of the next company's 401k program. At that point you can control your own retirement funds in the roll-over IRA. (As always check with your own tax advisers to see if that's a good idea for your specific situation).
- saryant 11y ago401k rollovers have no tax implications.
- gst 11y agoThere are indirect tax implications: Once you roll over your 401k into an IRA you can't use the Backdoor Roth IRA technique anymore (well, you still can, but then you would have to pay taxes).
- jongraehl 11y agoDoes it help to have a brokerage that has only 401k rollover IRAs and another brokerage that's used for backdoor roth? (I'm guessing not). I've been postponing a 401k rollover for the reason you state.
- adestefan 11y agoNo. All of your pre-tax IRA accounts across all custodians are used when figuring out the taxes of the backdoor Roth. However, if you have a 401k at your current job that has good investments you may be able to roll your IRA into you 401k plan. That will clear out all the IRA assets to give you a $0 figure when performing the backdoor.
- 3pt14159 11y agoThe problem with broader indexes is that they invest in stocks that are subject to less scrutiny (small caps / mid caps) so it creates a vector for a pump and dump. I'm not saying that the S&P 500 is the be all and end all of American index investing, but I wouldn't want the S&P 500k either.
- inyourtenement 11y agoIt doesn't really work like that. Total Stock Market index funds are fine investments, which hold around 4000 US stocks. And since they are usually market-cap weighted, your exposure to each small-cap stock is small, so pump and dump isn't a real concern.
- 3pt14159 11y agoYeah, you, and the people downvoting me, don't really understand what I'm saying. Imagine I start a company and I get my friends to buy up the shares of it on the stock market. Now imagine the market cap is $10m the day before it joins the Russell 5000. The next day a seperate company goes bankrupt and my company is now 1/100000 of the Russell 5000, which means that ETFs that track that index are now buying roughly 20% of my stock, which raises the price to $15m. Next my friends can slowly sell out for the amount that they pumped, but they will never trigger a mass sell off, because I always had a controlling stake from the beginning.