Personal Finance – Caffeinated

Jolting For More Jingle Jangle

Even Experts are Misleading : Shaming the Wall Street Journal January 11, 2010

Filed under: Uncategorized — coffeecents @ 2:20 pm

Just a quick morning update.

Over at the Wall Street Journal , their most popular story in their personal finance section was originally titled “Active Funds Beat Index Funds”.  And the leading paragraph reads:

“Active U.S. stock funds were up an average 32.8% last year over all, compared with index funds’ 31.7%, according to investment-research firm Morningstar. Yet during the market’s brisk rebound from its March 9 lows, index funds took the lead, surging 82% as active funds jumped 73%.”

Nice.  Except that, of course, no mention of expense fees and how they differ (signicantly moreso) until at the end of the article.  So the WSJ leads with the premise that active > index, thus priming the reader to believe active funds are better.  This leaves the clarification of actual expenses to later.  Then, they note that the average active fun charges .5% in fees more than the average index fund and the average active fund has transactions costs of 1.4%  (index funds tend not to have much, if any, transactions costs, relatively speaking).   so that’s a net difference of 1.9%, clearly making up the gap.  These numbers I found in the WSJ article at its end something most readers won’t see, because most readers just glance at the top and bottom of an article.  Nice burial.

Failing more, they don’t connect the dots, and state explicitly that accounting for expenses, the average index beats the average active fund.  I do.  And even accounting for some transactions costs, index funds still win out.

Key Takeaway from Coffeecents: Here at Coffeecents we strongly prefer index funds for the bulk of retirement savings.  And for those investors (budding or seasoned) who want a more active approach, use a discount broker and build your own stock portofolio rather than paying someone else a fee to do just as good as you could have (on average).

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