[normajean777]

Originally Posted by Chrysostom

More like 6%, inflation-adjusted. Maybe 7. And if you say the last 50 it's almost down to 5%. And this is also during the time that the US grew to be the world's dominant superpower.

(I'm not suggesting for or against the S&P 500, by the way. Just saying you shouldn't have unrealistic expectations.)

I don't disagree with that, but keep in mind its all relative. I can't really find any firm stats, but this article suggests that 75% of fund managers routinely fail to beat the index.

In the wikipedia article on the legendary Bill Miler, famous for beating the index 15 years in a row, "he estimated the probability of beating the market in the 15 years ending 2005 was 1 in 2.3 million".

The amount of return is not really the most relevant information on why to choose investing in the index fund. Its just that it is basically the most secure way to make any return over the long term. It beats the vast majority of all funds. It also beats commodities, and bonds hands down, although comparing it to real estate is a little bit less apples to apples, Forbes seems to suggest that the index fund could be a better investment compared to that area as well.

Diversification is important, but the S&P 500 is really all the stock diversification that you need. From there you could go on to add a bond portion of your fund (depending on the amount of safety you would like), or perhaps more exotic things as well, if you wish to increase risk.

[Chrysostom]

Originally Posted by normajean777

I don't disagree with that, but keep in mind its all relative.

Yes, and people have unrealistic expectations too often -- it's not just relative, in the end it's absolute returns, making or losing money. For instance, too many state pension funds have based their solvency numbers on 8% returns. That's just not going to happen.

Originally Posted by normajean777

I can't really find any firm stats, but this article suggests that 75% of fund managers routinely fail to beat the index.

A better stat would be this: take the top 50 winning mutual fund managers last year, and see if they beat the index next year, the year after that, etc. It's not extremely far from a coin toss as to whether they will win again the next year on net returns -- that is, once fees and such are taken out. The point is not that the index cannot be beaten. It certainly can. And most mutual fund managers could beat the index consistently if they managed smaller amounts of money. I destroy the index every year, but it's because I deal with a very, very small amount of money. Give me a fund to manage and I would have no chance against the index. But then you've got folks like Paul Tudor Jones, Ed Seykota, etc., who can beat every index in sight even with gigantic funds because they are just that good.

But I suppose the point to take away is this: You're not going to beat the index yourself without a whole lot of work. A whole lot of work. A whole lot of work. And you're not going to pick a mutual fund manager who's going to make you 10% per year out of a hat; if you find a manager that good, it will take some work to find him.

Originally Posted by normajean777

In the wikipedia article on the legendary Bill Miler, famous for beating the index 15 years in a row, "he estimated the probability of beating the market in the 15 years ending 2005 was 1 in 2.3 million".

I don't mean to nitpick, but that could be a little misleading if you don't think it through. There's only one undefeated season, but lots of teams win the Super Bowl. You can win the World Series of Poker even if you lost a bunch of hands here and there. Beating the index over 15 years is different from beating the index each of 15 years. So, yes, it's very improbable that someone would beat the index each of 15 years. It's also very improbable that someone would be beaten by the index each of 15 years. Of course, making sure we don't get too carried away with this shouldn't detract from the broader point: don't think you're smarter than the market. You're not. Folks who beat the market aren't, either. They're just smart enough to know which pond is small enough for them to play in. But even mastering your own pond is something that only a small number of very dedicated people will do.

Originally Posted by normajean777

The amount of return is not really the most relevant information on why to choose investing in the index fund.

Good, that's fair, but let's highlight the stuff that really is important and make sure to have level-headed expectations.

Originally Posted by normajean777

Its just that it is basically the most secure way to make any return over the long term. It beats the vast majority of all funds. It also beats commodities, and bonds hands down, although comparing it to real estate is a little bit less apples to apples, Forbes seems to suggest that the index fund could be a better investment compared to that area as well.

Diversification is important, but the S&P 500 is really all the stock diversification that you need. From there you could go on to add a bond portion of your fund (depending on the amount of safety you would like), or perhaps more exotic things as well, if you wish to increase risk.

To offer the balancing side: "Investing in the s&p500" (or whatever index) sounds good but you have to know how actually to do it. You can't just buy 100 shares of the index for $1000 or something. It would take a large sum of money, like six figures, just to be able to buy the index as it is weighted in lots of 100 shares (so-called "round lots," the standard minimum size of an order). And if you've got $800 or $8000 or even $80000 left over, it will just have to sit in cash. Then you've got to re-weight your portfolio whenever the index is changed, incurring at least some trading fees. Funds, on the other hand, do all of this for you, so you can just drop your money into them and they will be weighted properly with ease thanks to economies of scale.

That's why it's worth considering an investment advisor. They are professionals. They know a lot about this stuff. And they can provide you with financial options that are tailored to your scale. So there's balance there. There are real reasons funds exist; they don't just exist to take your money. And they're a lot better than anybody who thinks he's just going to go beat the market on his own, because how hard could it be? (Not that you're suggesting that.)

[normajean777]

Originally Posted by Chrysostom

To offer the balancing side: "Investing in the s&p500" (or whatever index) sounds good but you have to know how actually to do it. You can't just buy 100 shares of the index for $1000 or something. It would take a large sum of money, like six figures, just to be able to buy the index as it is weighted in lots of 100 shares (so-called "round lots," the standard minimum size of an order). And if you've got $800 or $8000 or even $80000 left over, it will just have to sit in cash. Then you've got to re-weight your portfolio whenever the index is changed, incurring at least some trading fees. Funds, on the other hand, do all of this for you, so you can just drop your money into them and they will be weighted properly with ease thanks to economies of scale.

Agreed on most of your points. Though I didn't quite mean to invest in the physical S&P 500 (which doesn't technically exist per say). My earlier post mentioned the Vanguard fund that weights itself accordingly to the S&P 500. The fund very likely has the absolute lowest management fees of any fund (something like 0.1% or so of assets).

To the Op: Investment advisers are great to talk to if you need personalized investment advice.