Comments on: Why We Always Recommend Buying Low Cost Index Funds

By: Charles

Charles — Fri, 18 Nov 2011 17:40:12 +0000

I too sympathize with your reader. Been there many times over and over again. I’m contemplating just quitting the market because it’s been such a frustrating year. But it’s almost like an addiction too. Every time I think about quitting, I end up depositing more money.

By: MoneyPerk

MoneyPerk — Tue, 16 Aug 2011 05:14:05 +0000

I agree that index funds are very safe, and almost crash proof. But, it’s hard to find good funds that will give you the return on investment that you want. I like stocks because there are ways around to decreasing your risk involved. For instance, information you get about a particular company can significantly decrease your risk. Another way is to analyze stocks carefully. If done correctly, you can see how much the company has in debt, how much they continue to spend, or if they have enough invested in assets and have a promising cash flow statement.

I don’t want to give the wrong impression and lead people to think that index funds are not a good investment. They are good investments and should be components within the portfolio for sure.

By: MoneyNing

MoneyNing — Fri, 27 Jul 2007 23:24:20 +0000

Pinyo: That’s true but you can always use something like Zecco if you are worried about fees.

By: Pinyo

Pinyo — Fri, 27 Jul 2007 23:06:43 +0000

I agree. There is one situation where mutual fund is better, that is if you have small amount of money to add regularly. With no load fund, you incur no trading expense. However, you will get to the point where you have enough money in the fund to make an equivalent ETF more attractive.

By: MoneyNing

MoneyNing — Fri, 27 Jul 2007 21:47:37 +0000

Pinyo: I think ETFs are much better than mutual funds in general because they trade like a stock which means they are much more flexible (cheaper, can be sold immediately if need be etc etc).

By: Pinyo

Pinyo — Fri, 27 Jul 2007 18:45:26 +0000

Calvin: I was surprised too since it was a low turnover fund. I have since switched to ETFs.

By: Calvin

Calvin — Fri, 27 Jul 2007 16:52:22 +0000

Pinyo: Geez $600 dollars distribution for $4000?.? That’s a pretty big percentage. I guess you are buying those actively managed mutual funds huh?

Carl: Umm. I wonder what’s the logic behind this since I assumed someone has thought about this scenario and deemed that it is fair to only tax gain distributions.

All: Thanks guys for the explanations.

By: MoneyNing

MoneyNing — Fri, 27 Jul 2007 15:41:07 +0000

Carl: I think the book is called Unconventional Success: A Fundamental Approach to Personal Investment (I just did a search on Google).

Actually I’m starting to think more and more that low cost index funds are the way to go even if I can pick individual stocks. Yes they are quite boring, but it is what I need since I don’t want to manage so much money since
1) I’m not extremely good at it.
2) I don’t have time to handle the research needed along with the blog, my job and my family
3) read 1 and 2 a few more times…

By: Carl

Carl — Fri, 27 Jul 2007 14:09:11 +0000

I think one problem with mutual funds is that they distribute capital gains, but they do not distribute investment losses. That means if they sell a position at a loss, the fund takes the income offset for itself, they do not distribute it to the fund holders to lower their taxes. When they sell a position at a gain, they distribute this gain so the fund holders must pay the usually short-term capital gains. It does not seem fair, and it is why I do not hold mutual funds outside my 401k.

Even in a 401k index funds are a good idea. Seems many mutual fund managers are too smart for their own good, and waste a lot of money in transactions when buy-and-hold is usually the most effective equity strategy over the long term.

There is an excellent book about this called by David Swenson. Does anyone remember the name?

By: Pinyo

Pinyo — Fri, 27 Jul 2007 12:45:26 +0000

Calvin – yeah, it hurts when the fund goes down and give you a distribution. It hurts to buy a fund late in the year, get the distribution, and essentially pay other people’s capital gain taxes. A fund can distribute even when it looses money because by law, funds have to distribute any taxable gains from investing to shareholders each year. So if the fund sell some of its winning stocks, you get stuck with the distribution. For example, my $4,000 holding in HFCGX distributed $600 last year. Luckily, it was in my IRA so I didn’t have to pay tax.

MN – no problem. thank you.