Author: A.T.

Today is Lincoln’s birthday, even though for economy’s sake it has been averaged into February 22, Washington’s birthday, to produce the glorious long weekend I hope you’re about to enjoy. (They were, as you know, the eight-and-a-halfth president, and their birthday is, on average, the 17th.)

“You can fool some of the people all of the time, and all of the people some of the time,” said Abe, who never tried to fool anyone. “But you can’t fool all of the people ALL of the time,”

To which my friend and consumer advocate Jason Adkins — disheartened by the kind of election victories big-money can buy, like that of the sugar growers in Florida last November — appends, sadly: “but you don’t have to.”

(Indeed, if you look at the success the tobacco companies have had so far resisting efforts to restrict their promotion of cigarettes to kids and their parents around the world, one might conclude that sometimes you don’t have to fool ANYONE to get your way. You just need a lot of money.)

“Propagandists, from Shakespeare to Jacqueline Susann, have been telling the unrich that money doesn’t buy happiness. The unrich, not being immune to spasms of common sense, sometimes wonder about this.” — Anthony Haden-Guest

You absolutely don’t need money to be happy, and having money absolutely won’t guarantee that you are happy.

But it sure helps.

You knew this of course, but I find any excuse I can to trot out Anthony’s delicious quote.

What could spook this great bull market? Here’s a contrary thought: a capital gains tax cut. Sure it would be great news for investors. But putting aside all the questions of whether it’s a good idea, whether it’s fair, and so on, I want to contribute just one small idea to the ongoing debate: If you do cut it, cut it gradually.

Think about it. Say the capital gains rate were — bang — cut in half. Millions would have an immediate reason to sell; no one would have an immediate reason to buy. Don’t you own something you think is kind of toppy, but hate to sell because of taxes? Or even if you don’t, don’t you fear others do? Might a lot of them not want to sell — fast, before others do and drive down the price — as soon as the lower rate takes effect?

I could be wrong. Maybe no one would look at this sudden change in the rules of the game and want to take advantage of it . . . but when has that ever happened? Or maybe people would be so electrified by the prospect of lower tax rates they would rush to buy more shares. But I think the reaction on the buy side, while positive, would be much more relaxed. What’s the hurry? So you’d have an imbalance: more enthusiasm for selling than buying — and that drives prices down.

Happily, there’s a no-brainer solution. Just phase in the cut gradually. E.g., cut the 28% top rate 2% a year for seven years. Selling would be spread out. (It might peak a little in January of each year, as each new tax cut notched in; but that’s a good month to absorb extra selling, because it already has a bias toward extra buying because of inflows from bonus money and the like.) Some would wait all seven years. Others would grab the 2% right now, now that there’s no longer any prospect of a large immediate tax break. Many would do something in between. Yes, there would be a bit of a bias toward holding on . . . but what’s so bad about that?

So if you DO cut it — and I’m not at all sure we need a drastic cut in the capital gains rate right now, much as I’d enjoy one — cut it gradually. (How about cutting it 1% for eight years, bringing the top rate down from 28% to 20%?)

And while I’ve been writing this mainly in terms of the stock market, don’t think there wouldn’t be an impact on the real estate market, as well — especially investment real estate. A homeowner who sells is generally, though not always, more or less simultaneously a buyer as well. And homeowners already enjoy enormous shelter from capital gains taxes. But with investment real estate, most of which (because of depreciation) sits with large unrealized capital gains, a chance to cash out at 14% instead of 28% might trigger a lot more FOR SALE signs than “Investment Properties Sought” classifieds . . . and thus depress prices.

Because remember: no one says you have to take the cash you get for selling a stock or office building and immediately reinvest it. Yes, you become a potential buyer. But what if instead of immediately buying some different stock or office building, you use the cash to pay down debt? Or to buy municipal bonds? Or to resurface your driveway?

So guys: whatever you do, do it gradually. If not, we may see prices decline even before the tax cut takes effect. (Wouldn’t a lot of people/institutions with money in tax-sheltered accounts, fearing selling when the sharp break in tax rates becomes effective, want to take the precaution of selling first?)

Not a bad time to be a stockbroker, or a real estate broker, though, if the tax barriers to selling are suddenly cut in half. And almost as good a time if the barriers are cut gradually.

Yesterday I argued against privatizing Social Security. Today, a few quick thoughts on the other popular solution to the Social Security problem; namely, why not invest some or all of the Social Security Trust Fund in stocks? After all, everyone knows that over the long run, stocks outperform safer bonds — like all my mentors, I’ve been writing that for 25 years.

Wow.

The idea, I assume, is not to have Uncle Sam picking stocks and trying to outsmart other investors. The idea is to have perhaps 40% of these funds invested in a broad, broad index of the market as a whole.

(Interesting statistic Dan Nachbar kindly found for me: the S&P 500 stocks alone account for about two-thirds of the entire valuation of every New York Stock Exchange, NASDAQ and American Stock Exchange issue. So though an even broader sweep would absolutely be appropriate, it wouldn’t be hard to absorb quite a bit of dough in “just” these 500 stocks.)

Sadly, the Trust Fund is not as large as you might imagine. It’s largely a “pay as you go” kind of retirement system, where all our contributions used to go right back out to our grandparents, with nothing put away for our own retirements.

In the past decade or so, however, we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all.

That cushion has been growing fatter and fatter (although not so much as to solve the long-term problem), and it’s all invested in U.S. government bonds. After inflation, the Treasury bonds can be expected to earn barely more than 2%, while stocks have historically outstripped inflation by more like 6%. So, the thinking goes, why not juice up the return on this money?

Clearly, the injection of tens of billions of new capital in the market, if it happens, will have effects. One obvious one: raising stock prices (more demand, same supply, equals higher prices). But nearly as obvious: higher borrowing costs to the Treasury.

It’s true, Social Security allows the Treasury to borrow at “bargain” rates. But it’s our Treasury, our debt being financed. Do we accomplish much by raising our return in our right-hand pocket while raising our borrowing costs in our left? And is this really the time to start thinking about pumping even more money into a stock market already flirting with irrational exuberance?

And what happens to the market when the Baby Boomers pass through to the years when the huge buildup in funds needs to be withdrawn? Might this presage many years of a bad market, as any fool can see tens of millions of retirees coming down the pike? Might this lead people to try to cash out as early as possible to avoid the crush?

Talk about leaving an immoral debt to our kids! This one wouldn’t be a literal debt, just the semi-sure knowledge of a massive, long-term stagnant market at best, or a here-comes-the-Boomer-bulge panic and collapse at worst.

Not that this may not happen, 15 or 20 years from now anyway.

(This raises an intriguing prospect. You don’t want to get the government into the business of trying to manage the stock market. Still, the market might be even less prone to unreasoning panic than it is today if people knew that on steep sell-offs, the Trust Fund might take the opportunity to scoop up an extra $50 billion or $100 billion of securities. And it might even help keep the market from reaching dangerous overvaluations if people knew that the Trust Fund would occasionally “take profits” since it has, after all, no capital gains tax to worry about. But one can see all sorts of potential for political abuse and mismanagement.)

(And then there’s the question of why we should even limit this to the U.S. stock market. Overseas markets, in countries growing faster than we are, may do even better than our own. To the extent the Trust Fund could profit by stepping in to soften some other market’s panic — buying when prices have plunged — it could be a potent force in global economic foreign policy at the same time as it aided the world economy and piled up more loot for retirees. So perhaps a small portion of the investable funds should have the flexibility to go abroad, odd as that may sound at first.)

Bottom line: If Social Security funds are shifted from bonds to stocks, who will buy the Treasuries we no longer do? How high will interest rates have to climb to attract other purchasers?

I think we should table this discussion until, some years from now, the stock market seems extraordinarily depressed. At that point, we might well still decide to scrap the idea — but mere discussion of it could perk up the market, giving Greed a chance, once again, to wrest the reins from Fear. Today, Greed needs no help whatever.

In the meantime, what is the solution? It is this: Trim the CPI in line with more realistic statistics; index the retirement age to increases in life expectancy; reduce benefits for those who don’t need them; and remind everyone that for a really comfortable retirement, they need to fully fund those 401(k)s, IRAs, SEPs and Keoghs.

With all the talk about what’s wrong with Social Security (Medicare’s the real looming crisis), it may be time to debunk the reforms.

The most dramatic suggestion — to privatize the system gradually by moving people into mandatory individual investment accounts — has great surface appeal but some pretty big problems:

• While you’re making the transition, one generation must in effect shoulder the nearly impossible burden of two systems. After all, no one advocates stopping, cold turkey, the payments today’s workers make to today’s retirees.

• What do you do if a person invests poorly? You’d still need a safety net. Indeed, what an incentive to gamble! If you win, you retire in luxury. If you lose, you’re at least assured some poverty-level maintenance program.

• Won’t this leave an awful lot of unsophisticated people prey to all manner of sales pitches, commissions and transaction costs?

• But mainly (to my mind): why should everyone have to save — and live, once retired — as if he or she will live to be 110? Social Security is not just a “pact between generations,” though it is that, with each generation pledging to assist the previous one. (The problem, of course: we now have just 3.3 workers for each retiree, and we’re headed for just 2.) It is also a pact among citizens of the same generation.We all pay in more or less equally (given equal incomes), knowing that those who die earlier than average will have wound up subsidizing those who outlive them. Yet this seems a reasonable deal, because it keeps us from all having to live like paupers at age 65 in case we have to stretch our funds to last 35 or 40 years. (So there’s another reason we’d still need a taxpayer-financed safety net. Would we allow 88-year-olds whose cash has run out to freeze and starve?) Really, smokers should by age 55, say, be excused from further Social Security contributions, since they’re so much less likely to collect as much as nonsmokers. (Not that I’m seriously proposing this. Perversely, it would encourage nonsmoking 55-year-olds either to lie or to take up smoking.)

There’s a reasonable case for going part way, by restoring Social Security more toward the safety-net-of-last-resort bare subsistence sort of thing I believe it was originally intended to be. In other words, with enough warning, you could eliminate benefits to those who don’t need them and cut back somewhat on benefits even to those who do. The savings from this would be used to fund the individual investment accounts people are talking about. But why? Why take that extra step, in effect penalizing people who live longer than average, as tens of millions will?

After all, there’s still plenty of variety in retirement lifestyles. It’s not as if America becomes a homogenized, socialized society even with today’s rather modest benefit levels. Some retire in splendor; others eke out a life on Social Security alone. If the “safety net” is indeed a bit above bare subsistence . . . well, why not? For one thing, it’s one relatively small concession to a sort of national neighborliness. A social compact. It binds us together. We’re the only advanced country in the world without universal health insurance, and we no longer have the common experience of the draft or of Walter Cronkite every night. Maybe we should keep Social Security.

As usual, I know if I’m missing something here, I can rely on you to point it out.

Tomorrow:Social Security II (the problem with fixing the system by investing its funds in stocks)

I’m not saying you may not do well trying to beat the market, though not trying is often the wisest course. (On average, we can’t all be above average. The more time and money one spends trying to beat the average, the bigger the “handicap” that must be overcome just to do as well as those who don’t try.) Not long ago, I even laid out my top 10 reasons why you might NOT want to invest via low-expense, no-load mutual funds, even though that’s surely the best course for most people.

(Full disclosure: little of my own money is in mutual funds, and none of it in the Vanguard Index funds I’ve so long recommended. For the most part, I enjoy making my own mistakes.)

But there are just so many reminders of this basic fact: that most of the time you’ll do well — or at least better than most people who are trying harder — just “buying the average” via a low-expense index fund.

Latest example? This month’s Smart Money Magazine is emblazoned: THE SEVEN BEST MUTUAL FUNDS FOR 1997.(My first thought: what outfit conducted the focus group that determined “seven” would sell better than “ten?” Or maybe it was just good editorial instinct. We’re tired of “ten.” Ten is a cliché. Ten’s been done — to death. Ten is not particularly lucky. And ten is perhaps a tedious lot of choices to muddle through in these days of instant soup and widespread downsizing.)

So the “seven” part of the deal I was fully in synch with. But the rest? C’mon. The guys at Smart Money are every bit as smart as I am, which means they know as well as I do this is basically just good entertainment, good marketing, part of what makes the world go round. And little more.

To their credit, Smart Money did just what they should as part of this endeavor. Namely, they showed the results of last year’s picks. In a time frame during which the S&P 500 returned 27.85% (this was the benchmark they used), all seven of THE BEST FUNDS FOR ’96 did anywhere from considerably to dramatically worse. Not one of the best came close to the S&P (or, therefore, the Vanguard Index Trust). The best of the seven managed 20.86%, the worst returned less than 1%.

I have no doubt Smart Money’s picks for ’97 won’t have such an awful year relative to the S&P. Who knows: they could even match the S&P or, it’s certainly possible, exceed it. But could they exceed it by enough to bring Smart Money back up to even with the S&P for the two years? My guess is you could buy Smart Money and follow its mutual fund advice forever without meaningfully justifying the price of the magazine on this score, simply because the funds they choose will normally have a bigger expense-ratio handicap, on average, than the low-expense, no-load index funds, and therefore very possibly trail them.

This then raises the issue of, “Well, what if everyone invested only in index funds?” What if no one picked stocks, or funds that picked stocks?

I grant that if that day ever approached, the “inefficiencies” in the market — which are already there and create opportunities for the nimble (see, for example, my comment on spin-offs) — would become so glaring they would provide opportunities even for the lame. Which is why we’ll never get that far. There will always be a balance between people like me willing to try to beat the averages, some succeeding, most failing, and those taking the boring, prudent course.

Everyone has his or her own way of accepting a compliment. “Aw shucks” is good. “Thank you, sugar,” works for a certain sort of recipient. “Thanks for your kind words” is what an older writer once responded to a fan letter I had sent. His response had at once a sort of warmth and yet an arm’s-length formality that I decided to adopt should the occasion ever arise.

“Thank you for your kind words.”

Well, now comes Joseph Conrad — not literally, of course, but in 1920, four years before he died — with a turn of phrase that puts the rest of us to shame. I mean, gee whiz — English wasn’t even his first language. (Born Josef Teodor Konrad Walecz Korzeniowski in Poland in 1857, he wrote everything, including Lord Jim and Heart of Darkness, in English, his second language.)

To a gushing fan he wrote . . .

“I do not know when I shall depart on my last journey, and still less do I know what will be my destination, but you may be sure that if St. Peter shows any reluctance to open the door I shall use your name without scruple.”

Now, that’s a thank-you note.

Some market truisms seem positively antique they’re so deeply woven into the fabric of the Street. For example, “Don’t fight the tape.” Of course, they haven’t used tape for years — it’s long been a digital display. But everyone knows what it means.

“Don’t fight the Fed” is a bit more modern. And with Alan Greenspan leery of our overheating as the Japanese market did a decade ago (rich at 20,000 on the Nikkei Dow it nonetheless doubled — 40,000 — before dropping back to 14,000), one might keep that one in mind. I wouldn’t be surprised to hear him one of these days float the possibility of raising margin requirements from 50% to 55% or 60%. “The economy is sound,” he might say. “Stock market values reflect that. But one does worry whether some of the ‘irrational exuberance’ I speculated on a few months ago might not at some point warrant our considering the possibility of nudging the marginal market participant toward more prudence, perhaps by a small adjustment to the margin requirements.” Of course, it would be a much longer sentence than that, nestled into the middle of an answer to the New Delhi Times on the topic of agrarian reform. Never want to be too straightforward at the Fed.

Anyway, the truism I had in mind for this morning: “Cut your losses and let your winners run.” It is not something I’m good at. On the loss side, I’m stubborn and egotistical and have lost a load of cash over the years with this unassailable logic: “If it was a good value at 10, it must be a great value at 6.” (And then 4 and then 2.)

Sometimes, though not nearly as often as I’d have liked, that line works. I bought Citibank at 27 before it fell to 10, more at 10, and now it’s a million.

But that leads me to the second half of this: let your winners run. How much Citibank do you think I still own here at a million (well, 114)? I think I sold my last shares a while back at 40.

There are a lot of reasons for this, some rational, some psychological. I was on a panel recently with a psychiatrist who ascribed this sort of behavior to a “castration complex.” OK. Whatever.

The only point I want to make is that — in a taxable account — there is more than just market lore, or even common sense, going for this old saw. Cutting your losses makes for smallish but realized capital losses that will lower your income tax. And letting your profits run lets them grow tax-deferred.

Of course, if you never sell winners, in order never to pay taxes, you run the risk of owning some very over-priced stocks — and then, eventually, some stocks that crash back down to earth. “Don’t sell IBM” was almost as widely accepted wisdom for a couple of decades, as it rose to 400 and beyond, as “don’t fight the tape.” But then it fell to 40-something before the eventual turnaround.

So like most old saws, this one doesn’t always cut it. But think about it: “Cut your losses, let your profits run.” There’s the simple logic that if “the market” is going against you, maybe the market knows something you don’t and that if a stock is doing well, it may be because management of the underlying company is smart and will continue to be smart and will do a good job of growing earnings and dividends and so forth.

But however sound the basic logic underlying this strategy, taxes give it extra weight. Cut your losses; let your profits run.

Tomorrow: How to Take a Compliment

This was the headline in the Wall Street Journal, and it’s so simple and obvious it’s worth cribbing for those of you who missed it. (Something tells me a fair proportion of the people with mortgage insurance don’t read the Journal.)

As Andrea Gerlin explained (January 16), anyone who buys a home with less than 20% down typically is required to pay for private mortgage insurance. That covers the lender for any shortfall in case of default. Say the bank were owed $120,000 but the proceeds from the foreclosure were only $95,000. Mortgage insurance would pick up the $25,000 difference.

But once you’ve paid down enough of the loan, and/or the home has appreciated enough to give the bank a reasonable cushion, you are entitled to stop paying mortgage insurance (though you may have to pay for an appraisal and, even then, be persistent and determined with your bank).

So:

Are you or is anyone you love paying mortgage insurance? If you don’t know, ask your bank.

Might you be able to stop? If so, it’s just found money, with virtually no downside to you. (The downside would be that the bank might come after YOU for any losses after a foreclosure. But in many instances, that’s unlikely, and in states with “non-recourse” mortgages, it’s not even legal — California used to work that way, and still may.)

Shouldn’t the bank have to notify you of this after you’ve been paying for a few years, and the balance you owe has shrunk to less than 80% of the original appraised value? Yep. According to the Journal, that’s a reform that might be adopted. But in the meantime: check you mortgage.

A number of you were not pleased with my recent comment on the Motley Fool’s “Dogs of the Dow” strategy.

Under the subject heading, “Bad Calculations!!!” Mohammad Samiullah wrote, “It seems that you are doing inconsistent calculations. See response to your answer by Robert Seard. You should disclose your real motives rather than do haphazard calculations to misguide people.”

While I can’t imagine what secret motive Mohammed thinks I might have, I certainly read the article by Robert Sheard (it’s Sheard, not Seard) with interest. (If you haven’t visited the Motley Fool site, you should —http://www.fool.com)

Rather than make you click to find it and go back and forth between Robert’s comments and mine, I hope the Fools won’t object to my cutting and pasting his remarks here [with my responses in brackets, like this]:

FOOL GLOBAL WIRE by Robert Sheard (MF DowMan)

LEXINGTON, Kentucky (January 23) — A reader asked me to comment on today’s Andrew Tobias column (available at www.ceres.com), which was itself a response to a question about the Motley Fool’s beloved Foolish Four approach. And as I have no desire for this to be seen as the start of a flame war, let me point out that I agree with many things in his column.

[Ah, if the Democrats and Republicans could only be so civil. Needless to say, I much appreciate Robert’s approach, not to mention the plug.]

First, we all know that past performance is no guarantee of future performance, but since it’s the only thing we can measure, it’s what we talk about. That said, though, when you’re talking about decades of performance, most investors feel a little bit of security that the approach is sound, as Tobias mentions.

He also asserts a long-held Fool belief that most managed mutual funds just can’t beat the index funds, so as a first step, if you have to be in funds, at least check out index funds.

But his comparison between the Foolish Four approach and an index fund after taxes is where we part company. His claim is that if one rotates every year with the Foolish Four, and thus incurs capital gains taxes each year, then the buy-and-hold approach with an index fund, which defers taxes, is more attractive. Not so unless you cook the numbers as he has in his example.

[Just before we get to the cooking, or lack of same, I should point out to new readers what the Dogs of Dow strategy is: namely, that at the start of each year, you buy the second through fifth highest-dividend-paying of the 30 stocks that make up the Dow Jones Industrial Average. It’s a strategy that has some underlying logic but also some potential flaws, as I wrote last week, and to which Robert is responding.]

First of all, he reduces the Foolish Four return to 20% because he doesn’t believe the rate it has posted since 1971 (23%) is sustainable. Fair enough. But then he declares a tax rate of 40%, including federal and state taxes and a mixture of long- and short-term capital gains. Un uh! This approach only generates long-term capital gains if you update a year and day after your last update. No short-term penalties here, which means the federal rate can’t go higher than 28%.

[Fair enough. I should have used something more like 32% instead of 40% in my example. My motives were pure, but my thinking was sloppy.]

Then he declares a 15% annual return for the index funds. But that overstates the actual return of the Vanguard Index 500 fund since its inception in 1976 (14.2% according to the Vanguard representative I called). Now if you’re going to declare that the Foolish Four can’t possibly sustain its historical 25-year growth rate, isn’t it a little bit unfair to overstate the actual historical growth rate you calculate for the index fund?

[Well, here’s where we begin to disagree. In my comment, I said I thought both rates I was using in my example — 15% for the index fund and 20% for the Dow strategy — seemed wildly optimistic. So the real question is simply, by how much, if at all, the Dow Dog strategy will outperform an index fund. I still think I was being generous by saying 20% versus 15%. I’m not sure it will continue to outperform the index at all.]

But a more glaring disparity is that Tobias uses only a 35% combined federal and state tax rate for the index fund. That won’t do either. Both approaches are taxed each year on dividends and both are taxed upon any sale at the long-term tax rate. So those rates have to be the same or the comparison is meaningless. Choose 35% or 40% or whatever rate applies to you, it doesn’t matter, but the rate must be the same for both investment approaches.

[Again, fair enough. Let’s use 35% for both.]

Let’s compare apples to apples using actual historical return rates and the same tax rate (say a combined federal and state rate of 35%). After you take 35% out of the annual growth rate for the Foolish Four of 23%, you’re left with an after-tax rate of 14.95%. And that assumes the entire portfolio turns over every year, which of course doesn’t happen. Compound that for 25 years and a $10,000 portfolio grows to $325,630, after taxes.

Put the same $10,000 into an index fund at Vanguard’s long-term return of 14.2% and let it grow tax-deferred for the 25 years. That comes out to $276,473. Now take out the deferred taxes you owe on the gains from the original $10,000 at 35%, and the total value after taxes is only $183,207. That’s only 56% of the value of the Foolish Four portfolio after 25 years.

[Yes. As long as you assume the Dow strategy will blaze along at 9% a year ahead of the market — 23% a year instead of 14%, in this example — then you should certainly follow it, regardless of taxes. No question. But can it really be that the second-through-fifth highest-paying slots on the Dow are so magic that they will outperform the broader market at all in the future, let alone by 9% a year? Maybe, but I think that’s a very aggressive assumption. Robert is well within his rights to use a 35% tax rate. And he is of course right that with hindsight, you would have done great using this strategy. But can you really use historical returns to predict the future this way? I can say with some certainty that the index fund will perform just slightly worse than the index (because of the management fee). Can the Motley Fool predict with any reasonable certainty how the dogs of the Dow will do? Might the market of the next 25 years act somewhat differently in this regard from that of the last 25 — especially now that so much attention is being focused on this strategy? The attention itself could be self-fulfilling and make it work even better for a while . . . but in the long-run it could make it work worse.]

So while I agree with Tobias that taxes are important and that index funds beat out the vast majority of managed funds, I don’t at all agree that taxes render the Dow approach a weaker alternative than buying-and-holding an index fund. The numbers, when you compare actual rates of return and equitable tax rates, simply don’t support that conclusion.

*

Listen. You could certainly do worse than to try this. It’s not a crazy speculation, because the stocks in the Dow are not crazy speculations. And the historical pattern could continue unabated, and unaffected by the fact that a million extra eyes are focused on it now. But backtested systems rarely are the winners going forward that they were when “discovered” by looking back. And selling most of one’s holdings once a year, exposing the gain to tax, really is a weighty handicap. Consider: Warren Buffett has managed to compound his money at something like 26% a year for four decades. At that rate, $1 grows to $10,000. But chop taxes out of that 26% annual return (using a 28% tax rate, which cuts the return to a “mere” 18.7%), and that same $1 grows to just $950. Big difference: $10,000 versus $950. Not that any of us can do as well as Buffett. But I do think it makes the point. Because the Dogs of the Dow strategy entails considerable annual turnover, it must appreciably outperform the index funds (unless you’re investing through tax-deferred accounts) just to keep up.