Mutual Funds VS Market Index Funds

yes, Jeff's weather is in Phoenix. Hi Jeff, how are you? I'm fine Dave, thanks for your time today sir. Sure, how can I help? I have a question about the 401K retirement plan. I watched a documentary on PBS and it showed something. pretty compelling evidence that investing for retirement in 401k because of all the fees associated with it that over 50 years can erode those fees can erode like two-thirds of your original investment and they highly recommended the advantages of being in something It's called a 401k

index

fund

market

vs

mutual

fund, so I guess my question is twofold: exactly what is a

market

index

fund and what is your opinion on it.

Which one should I retire to? Well, a market end. An index is anything that models an index fund. is anything that models one of the particular indices, the best way to do it is to give you an example, the S P 500 is an index, the Dow Jones Industrial Average citing what the stock market has done today in the news is an index , the best, the best. The example is the S P 500 and what is standard and poor is a company that qualifies, does all kinds of qualifications and research in the stock market and has rated the 500 largest companies on the New York Stock Exchange, which are the bigger. companies, in other words, the largest publicly traded companies in America, so those 500 companies, uh, what their stocks do really represents in a very real way what the stock market is doing, it's a index fund.

Okay, you could get an index fund that's trying to measure or mirror some of the international markets or some of the small cap stocks like on the Chicago Stock Exchange, but the most commonly known one that they would refer to would be something like an S P 500 now, so if that if that if that if those 500 the stocks are the index, if you want to index them, rather they are the measuring stick. What we're trying to do if we're creating an S P 500 index fund is we're trying to create a fund that mirrors what those stocks do.

As a group, you may or may not have the 500, but they are doing everything they can to do exactly what that index does with that

mutual

fund, so a S P 500 fund will actually give you pretty close to exact. The rate of return that the stock market offers you is neither better nor worse. In fact, it is considered the baseline when compared to it to see if another type of mutual fund is outperforming the market. See what I'm saying? the 1.0 in beta means it is the baseline and if your fund, if you are charting it, if your fund's growth line is above the s p then you have beaten the Mark, if it is below the s p you have a underperform the market, well, a big There are many mutual

funds

that underperform the market, but there are many that outperform and beat the market, so the problem with the PBS special is that this is the number one reason people retire with no money is not because of the rate of return and it's not because of fees, it's because they don't put any money into retirement and we have tons of research that shows it and all these guys that start to charge fees or worry about the 401K structure are, you know?

From a liberal political perspective, try to figure out what's wrong with America today and capitalism is somehow bad or something and they have that as a background in a lot of these things, you're never allowed to charge a fee for anything in their minds and it's the underlying current and it's PBS, so we know it's there, but other than that, the truth of the matter is that the research indicates that getting people to invest is the first thing you do and the second thing you do if they want. to win is the rate of return they get on their money the last thing that is an indicator of whether they end up with money is the fees well I listened to your show and I mean it tells me I need to be on those I mean my job . has the 401K with a match and your program tells me that's where I should be, yeah, and I heard you mention that there are four different types of mutual

funds

, everything you know related to risk, path and return, so I guess I'm asking.

So the last part of the question is: Do I think it's okay? Let me finish the last thing if the main reason people don't have money in retirement is because they don't put money into How do you work out what you earn? it's easy to invest for retirement payroll deduction it's the easiest way if we're talking about philosophy to get people to do anything that's why the IRS gets away with taking most of our money anyway necessary and we acted like it was okay because if you had an IRS guy standing at your front door and you had to hand him cash when you walked out every day without your money, you know there would be a revolution with what we pay in taxes, but we all we're dumb about payroll deduction, the 401K allows the same automatic way of doing it, so I'm a fan of the 401K philosophically for that reason, now I put money in my 401k, yes I put money in my personal 401K, is it the Lo The only thing I do to build wealth, no, it's not the only thing, but it keeps the government's hands off the taxes, it keeps the tax money off and if it's a Roth IRA, a Roth 401k, it's growing tax free and yeah, I recommend four types of growth stock mutual funds none of those were index funds for some growth growth and income aggressive and international growth now in about 401k the selection of funds you are seeing is so bad that your growth fund category could be filled with the S P 500 your aggressive growth could be filled with a Russell index, which is the aggressive growth index um fund if there's an index fund in there, that's fine.

I'm not against that, um, but look at your mutual funds within your that you have the opportunity to select. and in every mutual fund outlook there is that trend line s p Base line and then the trend line of the growth of your particular fund and you can see if the funds you are considering as having a history of underperforming the market, if not They do, they don't. Use it use an index fund, you know? But let me ask you: These are all managed mutual funds, so all mutual funds have those different fee levels. Well, there are no loading funds and there are loaded funds.

All mutual funds have some fees. A no-load fund. it means no commission, that's what it means, but it has a maintenance fee and the maintenance fee comes out every year, the commission comes out only at the beginning, so what you're looking at is not, if they have fees, you're looking at The What is called expense ratio? When you look at the prospectus, you can see it and you want to see it as a 10-year average. What is the average annual expense for all rates? They are grouped in that index in your prospectus and it is. federal law has to be there, okay, and you're looking at it, here's why you're looking at it, let me give you an example, by the way, this is a great call, thank you for asking these questions because it's very helpful to teach this to everyone.

In a no-load fund there is no fee, but they now charge an annual maintenance fee. If they charge a two percent annual maintenance fee and do it for 10 years, then your average will be two percent in a fee-laden mutual fund. it could be five and three quarters percent, most of them charge a commission up front when you buy it and then the maintenance fee could be 0.5 or 0.6 and when you do those calculations it will be cheaper than a maintenance fee two percent annually. no commission over a 10-year period, so your expense ratio may be cheaper with a loaded fund, your total expenses you pay over a 10-year period may be cheaper with a mutual fund than a no-load fund, eh, but that's not always the case, so if you're really worried about expenses, then you look at the expense ratio and it's the truth, that's how the apples and oranges compare between a commissioned fund and a non-commissioned fund, right? that makes sense?

Yes, sir, then you look at the average, but here's the thing, listen to this, if your expenses increase one percent more than the average over a 10-year period, but you get a four percent higher rate of return than the result. I can do it. that I can do that that's why performance is your primary measure of how you choose a fund that's your primary measure the last thing I look at is expenses and very rarely do I find that expenses are the deciding factor and you know that's the reality. that's not theory that's reality good foreign question