Of Index Funds and Politics

DON’T MESS WITH TEXAS

I bobbled yesterday’s link to the 2004 Texas Republican Party Platform (which affirms that the United States is a Christian nation and calls for, among other things, abolishing the separation of church and state). This is important, because if a 100-year religious war is what you want – rather than a focused, effective, collaborative, international war on terror – you probably want an evangelical Christian from Texas who suspects he may be God’s messenger leading the charge.

INDEX FUNDS (AND POLITICS)

Parks Stewart: ‘You turned me into an index fund disciple, but I saw something a little rattling recently. I read a small story in the Saturday paper referring to a National Bureau of Economic Research paper that says the average mutual fund does show some stock picking skill. Can our crack research team debunk this? On a political note, your two guys scare me to death. I’m a conservative, but I’m not totally thrilled with the way we’ve conducted ourselves (not necessarily the decisions themselves but how we’ve arrived at them) and some of the money decisions we’ve made. Heck, we’re blowing money the way you guys normally do.‘

☞ Well, actually you’re blowing money the way Reagan and Bush did . . . only now, with the advantage of an all-Republican Congress, you’re blowing it worse. And worse still, when you consider what you’re blowing it for. Not only have the routine pork projects skyrocketed; much of our budget deficit was incurred for the least urgent need imaginable – huge tax breaks for (very nice) people making millions of dollars a year. Not to mention the gross mismanagement of the war on terror, which could have been far less costly yet far more effective. (Tell me again why we didn’t send troops in to get Bin Laden at Tora Bora? Why we rushed into war in Iraq without the widespread support we would have had if we had acted more deliberately. Why we went in without a plan to win the peace?)

Don’t be scared of our two guys. They have the advantage of being much more thoughtful than President Bush – and they don’t imagine that God is speaking through them. THAT’S scary. Meanwhile, with advisors – and endorsers – like Bob Rubin and Warren Buffett, what scares you about John Kerry? Rubin and Buffett know a bit about the world, too.

But now back to your question:

<<the average mutual fund does show some stock picking skill>>

Versus whom? The average bank trust fund? The average pension fund manager? The average broker? I suppose it’s possible that, as a class, mutual funds might slightly outperform some other brand of money manager, or the do-it-yourself general public (who mostly don’t do it by themselves) – but can they do it by enough, over time, to make up for the extra fees and tax exposure they incur versus index funds?

I haven’t read the analysis you linked to, but one way mutual fund performance numbers often get skewed is by looking only at existing funds, excluding the underperformers that were folded or merged out of existence. Even if that wasn’t a flaw in the paper you cite, I did notice in the précis that the best-performing funds tended to trade actively, which means a tax disadvantage if you hold them in a taxable account.

I’d stick with index funds, and take a few prudent plunges, if you can afford the risk, on the side.

Tomorrow: Oh, Heck – Let’s Hear From Someone Who Was There