<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (June 26, 1998) -- Recently a Foolish reader related a story to us about his retirement plan's fund company, which will remain nameless -- not so much to protect the guilty, but because it could have been any number of companies pulling the same misleading rabbit out of the hat.
Our reader was setting up his retirement contribution allocation and called the fund representative to select the Standard & Poor's 500 Index fund option. If you've been a reader of my columns for any period of time, you'll know that I wholeheartedly support such a move. Historically, more than 80% of actively managed funds do not keep pace with the S&P 500 Index. And let's face it; what's more "long term" than one's retirement plan at work?
Yet the fund company representative used what I consider to be unethical claims to convince the reader not to dump everything in the index fund. His claim? In bad markets, actively managed funds typically outperform the S&P 500 Index.
Let's think about that claim for a minute. If the market's going down and your fund manager is sitting on a pile of cash, of course that fund is going to outperform the fully invested index fund. As my son would say, "duh." But what's the comparison going to look like when the market's rising? That cash is obviously going to underperform the index under those conditions.
Now for the kicker. The market goes up 71% of the time. So what makes sense to you? Protecting against a drop on those minority occasions when the market goes down or staying fully invested for the majority of periods when the market's rising? (We're talking about your longest-term money here, don't forget.)
What the fund representative didn't tell the caller, of course, is that if you look at a longer history, an S&P 500 Index fund kicks most actively managed funds in the butt. And what's more, the fund rep didn't tell the caller that the real reason he is pushing actively managed funds isn't for the client's "protection," but rather because the management fees on actively managed funds are as much as three times higher than on index funds. Whose best interests were served in that sales pitch?
And the Wise accuse us of data mining in our Dow Approach research? Check out the whole story, Fools. Where self-interest reigns, the Wise are not looking out for the clients. Have a Foolish weekend!
Current Dow Order | 1998 Dow Returns
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
06/26/98 Close
Stock Change Last -------------------- UK - 13/16 51.44 IP + 5/8 43.88 MO + 9/16 39.63 EK + 11/16 70.13 |
Day Month Year
FOOL-4 +0.45% 0.35% 6.89%
DJIA +0.09% 0.49% 13.09%
S&P 500 +0.35% 3.89% 16.77%
NASDAQ +0.34% 5.10% 19.05%
Rec'd # Security In At Now Change
12/31/97 291 Union Carb 42.94 51.44 19.80%
12/31/97 206 Eastman Ko 60.56 70.13 15.79%
12/31/97 289 Int'l Pape 43.13 43.88 1.74%
12/31/97 276 Philip Mor 45.25 39.63 -12.43%
Rec'd # Security In At Value Change
12/31/97 291 Union Carb 12494.81 14968.31 $2473.50
12/31/97 206 Eastman Ko 12475.88 14445.75 $1969.88
12/31/97 289 Int'l Pape 12463.13 12679.88 $216.75
12/31/97 276 Philip Mor 12489.00 10936.50 -$1552.50
CASH $415.96
TOTAL $53446.40
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