Investing Topics

This is where I write about money and investing. I do have an MBA, after all, so I'm supposed to have ideas about such things. I have been a personal investor for many years. I tend to be really conservative when it comes to putting my money into things. It's probably the only area where you could call me conservative, without me decking you.

It's Clear - Index Funds are Becoming Too Popular

Jay Oyster's picture

I'm going to write about something that I normally never discuss . . investing. One of my favorite classes during the MBA program at the University of South Florida was a course in investing. I know . . . I thought that, too.  It was basically required. But I ended up really liking it. And I think it made me fairly smart about the current state of investing and money management in this country.  But even given that history, I will emphasize here that I am not a professional investment analyst. Taking financial advice from me is idiotic.  Still, doesn't mean I can't have an opinion or two.

The thing that got me to write about his is a recent opinion piece I saw on Forbes' online site by a contributor named Brian Portnoy. Portnoy's overall approach seems to be one of those new 'trendy' catch phrases of the moment, "Simplicity."  Although the argument in the piece is couched in moderating reasonableness. The title is not. It's called "Buffet's Bad Advice".  The point of the article is basically, 'Yeah, I argue that simplicity is great and all, but this recent craze pushing everyone to invest in indexed stock funds is just crazy talk, especially if you've manage to convince the Oracle of Omaha.'

I bought the argument supporting index funds about 10 years ago. And although I understand that nothing is simple when it comes to investing, the basic truth of it is there for everyone to see. Advisors say 'diversify'. But then they immediately say, 'give me your money and I'll manage it with my portfolio of stock picks, charging you only a minimal fee'. But managed funds have fees in the 2 to 5% per year range. So for it to be worth it, they damned well better earn from 2 to 5% MORE than the overall market. You're paying them to improve your results. They almost never do it. And its been proven that no one seems to be able to do it over the long haul. But here's the kicker. . . if you invest in a fund that just dumps money in ALL of the stocks in the market, you essentially get the overall return of the market. So for an S&P500 index fund, you're buying into 500 stocks at once . . . pretty diverse, and because they aren't doing tons of analysis to find the hot stocks, their fees are much lower, usually in the 0.1 to 0.3% range.