Doug on the market

Greg Nowell GN842 at CNSVAX.Albany.Edu
Tue Oct 13 14:11:54 PDT 1998


Doug advises index funds. In fact if you graph some of Forbe's winning funds against the S&P it comes out damn close. Forbes does take into account fees and whatever, especially 12b-1 fees, management, and taxes. I think when some of the funds, like Nicholas, shows up on the top ten list 17 out of 20 years that is not an historical fluke. But a fund which shows up as a winner on the Forbes list will not show up as a "market beater" on a last 1, 5, or 10 year list, necessarily, since performance over specified time is a different evaluation process than performance over cycles (as specified in the Forbes model). The Forbes winners may not do as well on a list of past-5 year winners, so part of what this issue raises is not "beating the market" as such but definitionally what constitutes "beating the market."

However, the ratings, as I have said, are for "up" AND "down" cycles. If you're with the S&P you get the average of all stocks. If you get into a Forbes fund which manages itself to be good in down cycles you limit the gut wrenching feeling of watching values fall. From what I have observed the funds rated high for down performance actually do fall less on a bad day, and rise less on a good day. And vice versa. Nonetheless, since it is impossible to know when it is better to be in an "up" oriented fund or a "limit the down" fund (I'm talking long in low beta stocks, not hedged), you will on average do pretty well in an index fund which has both.

Some funds are so huge, like Fidelity's Magellan, that they are in fact index funds, company claims to the contrary notwithstanding.

-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222

Fax 518-442-5298



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