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Index Funds Vs Managed Mutual Funds by G E Miller

Let’s take a look at index funds and compare them to actively managed mutual funds. It’s important to understand the distinction between the two, because you may have the option of both within your employer sponsored retirement plan. In order to truly understand index funds, you need to first take a step backwards and discuss what they are ‘cloning’ – stock market indices.

What is a stock market index?

Stock market indices measure the composite value of a group of stocks. Indices can be chosen through a set of rules or hand selected by committees. One of the more popular indices is the S&P 500, which is a committee selected group of 500 large cap (market value) stocks, mostly domestic, that are meant to resemble the market as a whole. Another example of a market index is the Russell 2000, which includes 2000 small cap stocks. You’ll also find indexes that measure different sectors of stocks such as international, health care, real estate, REIT’s, and just about any other way you can group stocks.

What is an Index Fund?

Index funds are a type of mutual fund that attempts to mimic the performance of a stock market index. Like a mutual fund, index fund share values are based on the net asset value of all of the stocks they have invested in. Rather than its holdings being regularly bought and sold through managed trades, index funds periodically change investments based on a set of rules or infrequent committee selected changes. A lot of them take the human decision element out completely.

The first index fund was created in 1975 by Vanguard founder John Bogle. Some believe that Bogle’s philosophy was based on the book A Random Walk Down Wall Street by Burton Malkiel, which argued that one cannot consistently outperform the market averages. To this date, Bogle (now retired from Vanguard) and Vanguard remain strong advocates for investing in index funds, and Vanguard is now the second largest mutual fund company in the world.

More recently, funds that follow indexes and trade on the stock market – ETF’s – are another passive index investment.

Why Index Funds are Better?

Proponents of index funds point towards data that shows that they consistently outperform their actively managed mutual fund peers due to the following reasons:

  • Usually they have lower management fees (because they aren’t actively managed).
  • They trade much less, so turnover ratio is lower. As a result capital gains taxes can be lower.

Comparing index funds to mutual funds often times will make them look favorable. There are mutual fund managers out there whose goal is to meet the market indexes, not consistently outperform them. Because they’re actively managed, their fees are higher and their turnover ratios are higher.  Also, in general, there are some horrible mutual fund managers out there. It makes sense to check their histories before you purchase any of their shares.

A Real Life Comparison of Index Funds versus Managed Mutual Funds

My opinion is that you should take advantage of what is offered to you. Vanguard is my employer’s 401K plan administrator and within my plan I have the option of both index and mutual funds. Let’s take a real life look at an index fund versus a comparable mutual fund within my 401K plan.

Index fund – Vanguard Total International Stock Index (VGTSX): expense ratio = 0.27%, no manager, has outperformed the MSCI EAFE international stock index in four out of the last five years.

Actively managed mutual fund – Artisan International (ARTIX): expense ratio = 1.21%, manager is Mark Yockey who started with the fund in 1995 (good longevity). ARTIX has only outperformed the MSCI EAFE international stock index in two out of the last five years.

The Results

Over the last five years, VGTSX has outperformed ARTIX with a total return of 146% to 100% (with almost 1% lower management fees). This is a significant difference. In this case, being presented with these two funds for international exposure, I would opt for the index fund (VGTSX) every time. However, if I was doing the same comparison within a personal IRA and had other actively managed options to choose from, I would do my research and look to see if I could find an alternate actively managed fund with a lower expense ratio, low turnover, a seasoned manager, and better returns than ARTIX and VGTSX. One needs to look no further than DODFX, which returned 189% over the same period of time, with a team of 9 managers and only a 0.66% expense ratio.

You’ll find a number of investors who invest solely in index funds because they buy into the Bogle rhetoric that index funds are superior in every way in the long run. In many cases, they are. However, there are always exceptions and you should do your homework.

If you have the option of choosing between the two, take a look at the results of the mutual fund managers available to you. When presented with limited options, I have opted for index funds. I’m starting to see the Bogle way, myself.

Clubalthea Wealth Management LLC, founding members needed

Dear All,

I would like to invite you all to form a company in the bay area who will serve the needs of its members and circles in the area of finance, wealth management, business coaching , health and life insurance, senior long term care, and finance and health education.

Anyone wants to volunteer their office space is welcome. Our first goal is on health and finance education.

We will ensure our members needs and wants in areas of finance and health are met first.

We welcome licensed insurance agents, CPA, estate planners, lawyers, and other business professionals who are leaving the high tech industry and wanting to pursue a business where their talents are rewarded and appreciated.

Please email Connie Dello Buono at motherhealth@gmail.com for your interests and what you can bring to the organization and your vision. 408-854-1883

6% Annuities vs 2% Bank CDs for 0-80 yr olds

Let me help you maximize your income from your savings with safe, higher returns, guaranteed, index strategy and liquid savings plan. Connie Dello Buono CA Life Lic 0G60621 408-854-1883 motherhealth@gmail.com http://www.clubalthea.com

I have annuity products from various insurance carriers in the USA.

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How much taxes eat out of your retirement savings

Using an index strategy IUL policy,  8% annual rate of return, 25% tax rate now and at retirement with yearly retirement savings or contribution of $5,000 ($417/month), the following table shows you how much will an IUL save you. Connie Dello Buono CA Life Lic 0G60621 408-854-1883 motherhealth@gmail.com

 

Years to save

Index IUL

Regular Taxable Investment account: IRA, 401K, pension

Doing Nothing

5

$31,680.00

$29,877.00

0

10

$78,227.00

$69,858.00

0

15

$146,621.00

$123,363.00

0

20

$247,115.00

$194,974.00

0

25

$394,772.00

$290,782.00

0

       

Free financial planning and review for bayarea pros, 3000 laid off Cisco employees and business owners

If you want to reduce taxes, review your life insurance needs, review your retirement plans, identify ways to have safe and lifetime retirement income from your annuities and IUL and get more from your savings without market risks and taxes, contact Connie Dello Buono motherhealth@gmail.com 408-854-1883 for 24 hr response time. CA Life Lic 0G60621

This free financial planning is for two weeks only to rev up my business and to help those who needs help the most.

Find ways to have peace of mind, protect your savings for a lifetime retirement income, and spend more time with your love ones and create memories while your money works for you.

Free info on rolling over 401ks to tax free or lifetime retirement income (with living benefits, funds during health threats) to all 3000 laid off Cisco employees.

Saturdays Tax free seminar in Fremont at 9am and Mon-Fri at 1-3pm in Saratoga and Cupertino.

Saving without taxes, probates and required minimum distribution should be possible.

Reallocate your idle CDs and high risks investments to a long term, safe, liquid and better returns.

Some annuities have a bonus between 20-30%, there are life insurance with return of premium and living benefits, funds during health threats and non-medical life insurance and for funeral expense. All of these products are suited to each person’s needs and wants.

Know your options, protect your assets and life so your HEIRs receive them and not theIRS.

Ordinary people get a share in the ecommerce global business

This is my personal invite to those who wants a share of the ecommerce industry. But first, my condolence to the loved ones of Robin Williams, who is my favorite comedian of all time. May God’s face shine upon him.

Dear All,

I would like to invite those who wants to earn an income in the ecommerce industry, with Amazon, Wallmart, Target and other retailers.

This is one stream of income I am not afraid to share to you all. Ecommerce franchise business share for less.  You may pass this along to others who really need to get out of financial woes.

Email me – > motherhealth@gmail.com  to get the link for info and to join and I wish to invite you all tomorrow in Burlingame at 6:30pm and in LA this Sat.
 
A global ecommerce, you have a share in the pie before going public in Jan 2015. Not much selling effort on your part.  You will not be disappointed. Retention rate as start up business owner is 98%. Like many of you, starting a business takes time to be in black but this one takes only a week.
 
$10k while your are sleeping in first 20 days. You can still do what you love to do.  My passion is still in finance education and health but I also need a stream of income in ecommerce.
 
Regards,  Connie
Connie Dello Buono 
Money coach and wealth strategist for tax-free retirement
1708 Hallmark Lane San Jose CA 95124
PS. Ask me for 6% index annuities and 13- 17% index universal life policies

Hit the Reset Button in your Brain by Daniel Levitin

Our brains have two dominant modes of attention: the task-positive network and the task-negative network (they’re called networks because they comprise distributed networks of neurons, like electrical circuits within the brain). The task-positive network is active when you’re actively engaged in a task, focused on it, and undistracted; neuroscientists have taken to calling it the central executive. The task-negative network is active when your mind is wandering; this is the daydreaming mode. These two attentional networks operate like a seesaw in the brain: when one is active the other is not.

This two-part attentional system is one of the crowning achievements of the human brain, and the focus it enables allowed us to harness fire, build the pyramids, discover penicillin and decode the entire human genome. Those projects required some plain old-fashioned stick-to-itiveness.

But the insight that led to them probably came from the daydreaming mode. This brain state, marked by the flow of connections among disparate ideas and thoughts, is responsible for our moments of greatest creativity and insight, when we’re able to solve problems that previously seemed unsolvable. You might be going for a walk or grocery shopping or doing something that doesn’t require sustained attention and suddenly — boom — the answer to a problem that had been vexing you suddenly appears. This is the mind-wandering mode, making connections among things that we didn’t previously see as connected.

A third component of the attentional system, the attentional filter, helps to orient our attention, to tell us what to pay attention to and what we can safely ignore. This undoubtedly evolved to alert us to predators and other dangerous situations. The constant flow of information from Twitter, Facebook, Vine, Instagram, text messages and the like engages that system, and we find ourselves not sustaining attention on any one thing for very long — the curse of the information age.

Every status update you read on Facebook, every tweet or text message you get from a friend, is competing for resources in your brain with important things like whether to put your savings in stocks or bonds, where you left your passport or how best to reconcile with a close friend you just had an argument with.

If you want to be more productive and creative, and to have more energy, the science dictates that you should partition your day into project periods. Your social networking should be done during a designated time, not as constant interruptions to your day.

Email, too, should be done at designated times. An email that you know is sitting there, unread, may sap attentional resources as your brain keeps thinking about it, distracting you from what you’re doing. What might be in it? Who’s it from? Is it good news or bad news? It’s better to leave your email program off than to hear that constant ping and know that you’re ignoring messages.

Increasing creativity will happen naturally as we tame the multitasking and immerse ourselves in a single task for sustained periods of, say, 30 to 50 minutes. Several studies have shown that a walk in nature or listening to music can trigger the mind-wandering mode. This acts as a neural reset button, and provides much needed perspective on what you’re doing.

Daydreaming leads to creativity, and creative activities teach us agency, the ability to change the world, to mold it to our liking, to have a positive effect on our environment. Music, for example, turns out to be an effective method for improving attention, building up self-confidence, social skills and a sense of engagement.

This radical idea — that problem solving might take some time and doesn’t always have to be accomplished immediately — could have profound effects on decision making and even on our economy. Consider this: By some estimates, preventable medical error is the third leading cause of death in the United States, accounting for hundreds of thousands of deaths each year. You want your diagnostician to give the right answer, not always the quickest one. Zoning out is not always bad. You don’t want your airline pilot or air traffic controller to do it while they’re on the job, but you do want them to have opportunities to reset — this is why air traffic control and other high-attention jobs typically require frequent breaks. Several studies have shown that people who work overtime reach a point of diminishing returns.

Taking breaks is biologically restorative. Naps are even better. In several studies, a nap of even 10 minutes improved cognitive function and vigor, and decreased sleepiness and fatigue. If we can train ourselves to take regular vacations — true vacations without work — and to set aside time for naps and contemplation, we will be in a more powerful position to start solving some of the world’s big problems. And to be happier and well rested while we’re doing it.