Run from actively managed securities funds

Dan Solin at Huffpo has repeatedly pointed out the folly of paying an investment “expert” to manage a securities fund. His advice goes against the grain; innumerable books, magazines and websites pretend that if you want to grow your investments, you need to pay someone to actively manage them. As Dan Points out in this post, the great majority of fund managers hyperactively stir your investments (which costs you money for all these transactions) and the fund typically does less well than passively managed index funds that cost a fraction of the cost of actively managed funds to maintain. Vanguard, for example, is a prominent company offering many passively managed funds that cost less than 1/10 as much to maintain as actively managed funds.

After pointing out new statistics showing the follow of active management, Dan offers this hypothetical conversation that you should have with the next investment professional who offers to help your funds “grow,” for a fee, by wheeling and dealing securities for you:

Broker: I recommend this [hyperactively managed] stock [or bond] fund.

You: You get a commission if I follow your recommendation, right?

Broker: Of course.

You: Based on data from both Morningstar and S&P, your recommended fund is likely to underperform a low cost index fund of comparable risk, right?

Broker: Yes.

You: Is this a farce or a con?

Then hang up.

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Erich Vieth

Erich Vieth is an attorney focusing on civil rights (including First Amendment), consumer law litigation and appellate practice. At this website often writes about censorship, corporate news media corruption and cognitive science. He is also a working musician, artist and a writer, having founded Dangerous Intersection in 2006. Erich lives in St. Louis, Missouri with his two daughters.

This Post Has 3 Comments

  1. Avatar of Ben
    Ben

    I had a similar idea as I was searching for deals in the stock market.

    Rather than buy the index funds, buy a few of their holdings which look good, and that way you sort of have your own index fund.

    I've been very lucky and/or shrewd in my recent foray into the market. I had been watching the market grow for a few years, kind of kicking myself for not buying in, then I saw the crash happen. I figured that it was probably as good a time as ever to invest so I joined Ameritrade. I've been buying tech (AMD is up 20 percent today), banks, and just recently jumped into gold. As of yet my portfolio has grown in cash value by 40 percent.

    1. Avatar of Erich Vieth
      Erich Vieth

      But Ben — you seem to be stock picking, which is the opposite of buying into a broad based index fund and leaving it alone. Nonetheless, congratulations to you. God must love you.

  2. Avatar of Ben
    Ben

    I'm probably confusing mutual funds and index funds. Anyway, I have about 60 stocks in my current portfolio, perhaps a bit heavy on tech and metals at the moment, but I strive for diversity; with some foreign currencies and chinese companies as well as some industrial and solar and oil. A well-diversified portfolio is basically the same as a fund that costs 1 percent in fees, but without the fees. One way is to look at the recent acquisitions/sales of top-performing funds, and mirror some of their moves. Then once I have a stock in mind, I look at the earnings, ratios, and for trends in the historical graphs of different time frames. As a general rule, I hesitate to buy stocks which are expensive (near their historical high), unless they are really bullish (ie Amazon).

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