|Advice from the index-fund mastermind
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Money market investing
You have said that most people hold five different funds, and that people should hold equity index funds and bond index funds. How much, if anything, should people hold in money market funds?
In general I look at investing as having no money market funds. If you're concerned about risk, you're better off holding a short-term bond fund. While the returns will be a little jagged if you draw them on a chart, they're upward about 95 percent of the time. Whereas a money market fund, if you put it on the same chart, will go in a straight line but will end up at a lower level, because that reduction in risk comes with a reduction in return.
When investing, do not own money market
funds. In saving for your emergency reserves, yes,
own money market funds. An important caution: Money
market funds are pure commodities. What differentiates
the highest- and lowest-yielding money market funds
is cost. The correlation between high cost and low
return or low cost and high return in money market
funds is 0.99 -- almost perfect. Avoid high-cost money
market funds at all costs in your emergency account.
ETFs vs. index funds
published a profile on Ben Stein in 2007, and he mentioned
you. Basically he said that you might disagree
as to which are ultimately better -- index funds or
exchange traded funds -- but that he finds them equally
attractive. You have been critical of ETFs. What don't
you like about them?
is not the idea of ETFs that I find unpersuasive.
After all, if someone wants to buy the Vanguard Total
Stock Market ETF compared to the Total Stock Market
fund directly, or to that point buy the SPDR, which
is an S&P 500 ETF, compared to the Vanguard 500 (Index
Fund), I don't have a bone to pick with them. I would
tell smaller investors who are dollar averaging: Don't
touch the ETF because every time you touch them, you
pay a commission.
In fact, I wouldn't buy the Vanguard
ETF because you pay a commission. What's the matter
with that? The answer is nothing. So Stein and I are
on the same square. What troubles me and troubles
me deeply is: What are ETFs? They are index funds
that you can trade all day and they are index funds
you pay a commission on. Those two things strike me
as a great disadvantage.
Trading is your enemy, because it's
based on emotion. People do trade them with great
rapidity. So I have a problem with trading ETFs, which
you are lured into doing if you watch the market all
day long, and also, the types of ETFs we have.
(In 2007) there (were) 690 types of
ETFs, and only 12 are broad-market ETFs, like the S&P
500 or the World Stock index or similar total-stock
indices. That leaves 678 funds that are vehicles for
speculating. Whether it's in emerging cancer shares
or the Taiwanese stock market, or the Nasdaq, those
are speculative things to do. I can't tell you they
won't work, but I can tell you that when you have
a speculative instrument that you can trade all day
long, I would bet an awful lot of money that you would
be better off instead of doing a lot of trading over
the next 10 years in those narrow, specialized, undiversified
and, in terms of commissions, costly instruments --
you don't have a fighting chance of beating the kind
of index strategy that I just described.
Updated: June 10, 2009