I will teach you to be rich blog

I recently found out about a rather interesting and useful blog maintained by a Stanford grad student
http://www.iwillteachyoutoberich.com/

Honest and plain talk about how to not to waste money... some articles are pretty amusing too!

[pandaboy]

Interesting...thanks for sharing!

Do participate in the trivia. I will post the correct answer soon.

[chenchow]

prince, I haven't looked at the link, but as far as I can remember, for the trivia, there isn't any right answer.

I acknowledge that the trivia is tricky. At the time of writing, we have the following votes

Funds that attempt to beat the market
50% [ 2 ]
Funds that always lose to the market
0% [ 0 ]
Funds that are actively-managed
50% [ 2 ]

However, the correct answer is the 2nd option (none voted though).

Index funds always lose to the market they track but only by a tiny amount. That amount is largely due to management fees & trading costs.

For example, consider the Vanguard 500 fund which tracks the S&P 500 index. If S&P 500 is up 10% for a certain period, the Vanguard 500 fund will be up approx 9.8%.

The difference of 0.2% is the management fee of the fund, the amount that you pay the fund managers to manage your money. 0.2% is very low -- it's like paying $2 for every $1000 managed. Actively managed funds have much higher fees, on average around 1.5%, I think -- that more than 7 times more than low-cost funds like Vanguard 500.

[chenchow]

prince, good catch....I do not look into the aspect of management fee, and perhaps some transaction fee...

To those who haven't heard of index fund,
http://www.investorwords.com/2429/index_fund.html

prince, good catch....I do not look into the aspect of management fee, and perhaps some transaction fee...

That's one of the reasons why I wrote this trivia. Many people don't realize that the difference between 1.5% (average mutual fund) versus 0.2% (low-cost index fund) can add up to a lot over a long period of time. Consider the following hypothetical example.

Fund A: Returns 10% - 0.2% = 9.8% per year. $1,000 invested over 50 years would yield approx $107,000.

Fund B: Returns 10% - 1.5% = 8.5% per year. $1,000 invested over 50 years would yield approx $59,000.

[crosshatched]

prince, good catch....I do not look into the aspect of management fee, and perhaps some transaction fee...

That's one of the reasons why I wrote this trivia. Many people don't realize that the difference between 1.5% (average mutual fund) versus 0.2% (low-cost index fund) can add up to a lot over a long period of time. Consider the following hypothetical example.

Fund A: Returns 10% - 0.2% = 9.8% per year. $1,000 invested over 50 years would yield approx $107,000.

Fund B: Returns 10% - 1.5% = 8.5% per year. $1,000 invested over 50 years would yield approx $59,000.

intriguing. show me that even the slightest figure could be significant after a period of time. But then again, 50 years.. isn't too long? sorry for the perception here, because I'm no business literate. I am on money. :twisted:

[bestcreation]

Your answer to the poll is still wrong, for 2 reasons.

Firstly, you are comparing apples to oranges when you compare the after transaction cost of an index fund vs. the before transaction cost of the benchmark index. Try emulating the performance of the S&P500 by buying all 500 stocks and maintaining the weights of those stocks while adding and eliminate positions when changes in the index membership occurs. Let's see who has better performance then. I dunno about you, but to me, paper profits mean nothing if it can't be translated into real profits.

the other reason is that index funds do not attempt to buy all the stocks in the indexes, at least most of them do not. Only a portion of the stocks in the index are invested. It's still possible to construct a portfolio that has the same risk characteristic of the index without all the stocks in the index, especially with a capital weighted index. In fact, most of these funds are constructed to minimize the downside while maintaining the upside. That optimism does not always hold in real life so you will see small differences between the indexes and the index fund that is NOT due to transaction cost but due to tracking error.

correct me if I am wrong.