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So, invest with intelligence and common sense; engage in an enlightened and rational discourse when considering the future; always have some significant portion of your assets both in stocks and in bonds; be sparing about precipitate and extreme changes in these proportions. And be skeptical about every prognostication you are given, including mine. If you have set an intelligent route toward capital accumulation, stay the course—no matter what.
Indeed, more than 14 centuries ago, the Talmud prescribed this simple asset allocation strategy: “A man should always keep his wealth in three forms: one third in real estate, another in merchandise, and the remainder in liquid assets.”
For investors, short-term bonds are a superior alternative to money market funds. Short-term bonds are relatively insensitive to interest rate fluctuations; long-term bonds are hugely sensitive. Most of the examples presented in this book are based on intermediate-term and long-term bonds.
Like the Talmud’s asset allocation advice, my guidelines are simple: as a crude starting point, two-thirds in stocks, one-third in bonds.
Review your own investment in various asset classes.
My guidelines also respect what I call the four dimensions of investing: (1) return, (2) risk, (3) cost, and (4) time.
Bonds are best used as a source of regular income and as a moderating influence on a stock portfolio, not as an alternative to stocks. Remember, the goal of the long-term investor is not to preserve capital in the short run, but to earn real, inflation-adjusted, long-term returns.
These wide variations in costs among mutual funds only marginally affect their quarterly returns, but they have a great impact on the differences in long-term returns.
Expense ratios of Mutual funds doesnt look much quaterly. But over long run it becomes a big amount.
What we are witnessing (as has been reaffirmed over what seems like time immemorial) is the failure of active managers, on average, to outperform appropriate market indexes, even before costs are deducted. It didn’t matter whether the managers were advising pension funds or mutual funds. In neither case were they particularly successful.
When fund investment styles (growth versus value) and market capitalization (large versus small) are taken into account, funds in the lowest-cost quartile outpaced funds in the highest-cost quartile
Turns out low cost mutual funds beat high cost ones.
conclusion: “Although investment strategy can result in significant returns, these are dwarfed by the return contribution from investment policy, and the total return is severely impacted by costs
Turn to simplicity.
The central task of investing is to realize the highest possible portion of the return earned in the financial asset class in which you invest—recognizing, and accepting, that that portion will be less than 100 percent.
There would always be some costs to the return on investment . Its upon you to be deligent and keep the costs to minimum.
market. Indeed, given the high costs of equity fund ownership, it is a mathematical certainty that, over a lifetime of investing, only a handful of fund investors will succeed in doing so by any significant margin.
The game of probability. Many high cost mutual funds out there only a few might succed. Low cost index will always win.
When All Else Fails, Fall Back on Simplicity
No matter what you hear or read, do not forget that we live and invest today in an uncertain world of finance, of volatile and interrelated securities markets.
Its a probabilistic world.
What, then, is the optimal method of approaching the 100 percent target and accumulating a substantial investment account? Rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance. In investing, I assure you that those characteristics will, over the long run, be rewarded.
The simplest of all approaches is to invest solely in a single balanced market index fund—just one fund. And it works.
Exactly what Buffet says. These legends cant be wrong.
As it turns out, you would have been wise not to waste your energy trying to find the best manager. Only two funds outpaced the low-cost index fund for the full period.
What I have described here is the very essence of simplicity: owning the entire U.S. stock market (and, for a balanced index fund, the entire U.S. bond market as well); making no effort to select the best manager; holding the asset allocation constant and making no attempt at market timing; keeping transaction activity low (and minimizing taxes as well); and eliminating the excessive costs of investing that characterize managed mutual funds. And it worked. Even if future outcomes of this approach are less successful, it’s hard to imagine that they could provide markedly inferior wealth
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“Hope springs eternal.” “I’ m better than average.” “Even if the game is expensive, it’s fun.”
The three lines that delude one from reality.
A low expense ratio is the single most important reason why a fund does well.
funds. The surest route to top-quartile returns is bottom-quartile expenses.
The costs that actively managed funds incur in buying and selling portfolio securities are hidden, but nonetheless real.
In active investing obviously there is lot of trading activity. When there is soo much activity we all know who eventually profit>>>> Brokers out of our money spent by the investment manager.
So, favor low-turnover funds, but not only because these costs are lower.
them. But I do not believe that they can identify, in advance, the top-performing managers—no one can!—and I’d avoid those who claim they can do so. The best advisers can help you develop a long-range investment strategy and an intelligent plan for its implementation.
But track records, helpful as they may be in appraising how thoroughbred horses will run (and they may not be very effective there, either), are usually hopelessly misleading in appraising how money managers will perform. There is no way under the sun to forecast a fund’s future absolute returns based on its past record.
Now, I must contradict myself ever so slightly. Two highly probable, if not certain, forecasts can be made: 1. Funds with unusually high expenses are likely to underperform appropriate market indexes. 2. Funds with past relative returns that have been substantially superior to the returns of an appropriate market index will regress toward, and usually below, the market mean over time.
(During the past 15 years, 95 percent of all equity funds have failed to beat the Standard & Poor’s 500 Stock Index.)
Isnt this argument enough to convince me to invest in Low cost index Mutual funds ?
managers. For a fund to earn a top performance evaluation, it should have, in my opinion, at least six to nine years in the top two quartiles and no more than one or two years in the bottom quartile.
that (1) have no history of closing funds—that is, terminating the offering of their shares—to new investors, or (2) seem willing to let their funds grow, irrespective of their investment goals, to seemingly infinite size,
funds. Too large a number can easily result in overdiversification. The net result: a portfolio whose performance inevitably comes to resemble that of an index fund. However, because of the higher costs of the non-index-fund portfolio, as well as its broadened diversification, its return will almost inevitably fall short.
The reason why overdiversification in Mutual funds does not work.
Morningstar noted that owning only a single large blend fund could provide a lower risk than any of the multiple-fund portfolios.
Why single fund is better than Multi fund ?
Complicating the investment process merely clutters the mind, too often bringing emotion into a financial plan that cries out for rationality.
The key to holding tight is buying right. Buying right is not picking funds you don’t fully understand; it is not picking funds on the basis of past performance; it is not picking funds because someone tells you they’ re hot or because they have managers who have been stars, or even because they have been awarded five Morning-stars; and it is most assuredly not picking high-cost funds. If you have avoided these fundamental errors, then simply keep an eye on how your fund performs.
Things to avoid when picking a fund.
Don’t select funds as if they were simply individual common stocks, to be discarded and replaced as they face the inevitable ebb and flow of performance. Select a fund with the same thoughtful consideration you would give to appointing a trustee for your assets and establishing a lifetime relationship. That approach is the very essence of simplicity.
Select funds as if you were to select your marriage partner.
Suppress the temptation to add redundant layers of diversification.
The success that indexing has enjoyed in recent years has been based in part on recognition that acquiring and holding, at extremely low cost, a broadly diversified portfolio dominated by the large, high-grade stocks that dominate the capitalization weight of the market itself is an intelligent long-term strategy and a highly productive one as well.
No matter what the future holds, long-term investors who have chosen an index strategy because of its merits are unlikely to be disappointed.
The gospel of index fund.
But the 75 percent of the market now represented by the large-cap stocks in the S&P 500 Index is not the market.
“Does it matter which index is chosen?” My answer, “In the long run, no,” was clearly on the mark.
In the long run it doesnt matter if you choose Nifty 50 or Nifty 500.
The skill of portfolio managers, then, would appear to be largely a matter of luck, a game of chance.
do you really want to pay these fund managers ??
The lesson remains: The principal reason that the returns of actively managed mutual funds fall short of the returns of the stock market is their costs.
Why an investor would opt to pay a commission on an index fund when a substantially identical fund is available without a commission remains a mystery.
Make sure you check the costs of index fund you invest in. Dont invest blindly.
What, really, is the point in your paying an artificially low expense ratio of, say, 0.19 percent for a few years, after which a much higher 0.50 percent fee may be assessed?
Be sure to read all the fine print about costs in the advertisements, and pay careful heed to the details in the fund’s prospectus.
The strong implication of these figures is clear: Whatever style they seek, investors who don’t seriously consider limiting selections to funds in the low-expense group and eschewing funds in the high-expense group should take off their blinders.
As Peter Bernstein tells the story in his marvelous book, Against the Gods, Blaise Pascal, the father of probability theory, cast the question of the existence of God as a game of chance: “A coin is tossed. Which way would you bet: on heads (God is) or tails (God is not)?” Paraphrasing Pascal, consider the chances of being on the losing side of the bet. If you bet God is, you will live a holy life and give up a few enjoyable temptations, but that’s all you lose. If you bet God is not and you are wrong, and you give in to all temptations, your evil life will cause you to be forever damned.
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painful. The risk, in short, is much greater if you bet on inefficiency rather than on efficiency.
Stay home and dig in your own garden,
Whether we consider academic studies (many of which, I presume, included tests of predicting future returns that were found wanting and were never published), or the pragmatic and unforgiving actual results of the funds with the best long-term records, or the picks of fund advisory services, or records of funds of funds, the odds of selecting mutual funds that are top performers in the future have proved extremely poor. The chances that individual fund investors will find the holy grail that will identify in advance the future’s superior performers seem equally dismal.
No firm way to predict the best mutual fund.
