Ryan T: “I dumped all of our Vanguard S&P 500 fund (VFINX) three or four years ago when I bought your book and, on your advice, switched to the Rydex Equal Weight S&P 500 fund (RSP). Over those years, Rydex is up 10% over Vanguard (74% to 64%). That’s pretty significant. Am I missing something? I know the expense ratio is higher for Rydex, but other than that it seems like a no-brainer.”
☞ The only things you may be missing are that the higher expense ratio (40 hundredths of a percent versus 9) is already accounted for in the result (the results are net of expenses) and that 10% is more than 10% (in that a 74% gain exceeds a 64% gain by 15.6%). If you’re up $100,000, that’s $15,600 extra — less the cost of my book, currently $9.81*.
A comparison of the two funds can be developed here. (Use the “compare” tab and then click “clear all” and then add VFINX.)
There’s no magic to this. I’ve long recommended low-expense index funds for that portion of your wealth you’d like exposed to the stock market. As argued in my book, index funds are like a horse with a 10- or 20-pound jockey, compared with actively-managed funds that run with 200 pounds (and often a lot more) on their back. (In addition to the explicit fees, they incur higher transaction costs by trading in and out and expose you to a higher tax bill if held outside a tax-sheltered account.) Over the long run, a 200-pound jockey has to be one heck of a talent to beat his emaciated 10- or 20-pound competition.
The wrinkle of equally-weighted index funds like RSP is that they will tend to own less of a stock that’s been bid up to the moon and more of a stock that’s currently out of favor. There’s no guarantee this will give you enough of an edge to justify the heavier (40-pound) jockey, let alone every single year. But over long periods of time it has and likely will continue to. (Why Vanguard doesn’t offer one of these with one of its trade-mark ultra-light jockeys, I don’t know.)
*Or $9.32 instantly delivered to your phone’s Kindle app.
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Responding to last week’s Bush V. Clinton post . . .
George L: “I don’t like the concept of dynastic politics. I believe it’s fundamentally dangerous for our democracy. What does it say that our system can only elevate super insiders?”
☞ Our system can’t ONLY elevate super insiders – our current president is proof of that, as were the two previous Democratic presidents, Carter and Clinton, both pretty obscure before they won. So Hillary would actually be the first Democratic super insider in quite a while. And hardly part of a dynasty — her dad was a textile wholesaler descended from coal miners; her mother’s dad, a fireman.