Index funds???

[Paddy]

Anybody own these?  Any particular recommendations?  How have they done for you?

[...has left the building.]

Index funds all do the same. Buy the one with the cheapest fees/loads/etc. possible.

[Nathaniel Firethorn]

I own a S&P 500 fund (Fidelity) and an REIT index fund (Vanguard.)

My main qualm about these is that if enough people own them, they can become just as volatile as single stocks. There is no such thing as a set-and-forget investment.

- NF

[...has left the building.]

My main qualm about these is that if enough people own them, they can become just as volatile as single stocks. There is no such thing as a set-and-forget investment.

- NF

Excellent observation!

[Paddy]

For some reason, I'm missing the reason for volatility as a result of wide ownership of index funds???  The underlying market (whichever market the fund is tied to) can be expected to increase (probably faster than inflation), correct?  And, these funds will have very low expense ratios, so they should just slightly trail the market in net earnings.  That's pretty much 'set and forget'.  What am I missing?

I'm roughly 60% in cash or cash equivalents, 20% in mutual funds (primarily value funds, large cap), and 20% in hard money loans secured by trust deeds.  I've got 5 years to retirement, so I'm pulling in my horns.

[The Rabbi]

I also dont see why they should be any more volatile than the general market.
An alternative is ETFs, or exchange traded funds.  These trade on the stock exchange like a stock but mirror an index like a mutual fund.  Their expense ratios are laughably small.  Good for a one or two time purchase.  Very tax advantaged as well.

[Nathaniel Firethorn]

The underlying market (whichever market the fund is tied to) can be expected to increase (probably faster than inflation), correct?

That's an assumption that I question, if "the underlying market" is traded as a single security, in volumes that are a sufficient fraction of the total volumes traded. If enough people decide to buy or dump S&P 500 funds (compared to those who are trading the component stocks individually), the S&P 500 will behave like a single stock.

I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)

- NF

[Telperion]

I prefer ETFs for the tax advantages, plus with my brokerage trading stocks is a bit cheaper than mutual funds.

Here is a site that lists ETFs:
http://money.cnn.com/funds/etf/

Pay close attention to fees, esp. for some of the "sector" ETFs.

[The Rabbi]

The underlying market (whichever market the fund is tied to) can be expected to increase (probably faster than inflation), correct?

That's an assumption that I question, if "the underlying market" is traded as a single security, in volumes that are a sufficient fraction of the total volumes traded. If enough people decide to buy or dump S&P 500 funds (compared to those who are trading the component stocks individually), the S&P 500 will behave like a single stock.

I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)

- NF

that might be true in the short term.  But in the long term the market, which basically represents the American economy, will revert to its true value.

[brimic]

Like others said, ETFs are nice because they have a very low expense ratio. I no longer believe in giving a fund manager figures approaching 1% for mediocre performance.

The only ETF I have money in currently is S&P Deposits Reciepts also know as SPDR "spider" Symbol 'spy'.

I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)

Something like that happened to Fidelity Magellen fund int he 1990s, wher eit got so big because it was the most populat 401K investment fund, that pretty much anything it did with regards to money put in by investors influenced the entire market.

Anotehr intersting thought- there are more stock mutual funds out there than there are stocks traded on NYSE and AMEX

[bratch]

Our LP bought index funds. When the markets were down in '02 we had an inverse fund.  Once things started turning around we went to a normal index.  Ours worked well for us.