Help me understand the love for index funds

[MaxRules]

Thanks for the great site and lots of good info. I'm a new investor and started a Fidelity account in December. I put some cash in the Spartan 500 index fund and then about a month later, upon the advise of a friend, put half as much in one of Fidelity's healthcare mutual funds. I realize it has been a bumpy road for the first part of the year, but this index fund doesn't seem to grow much. In fact I'm only $12 ahead right now. In my other healthcare fund that I have half as much invested, I'm $200 ahead. Is my fading love for index funds just because of the rough market so far this year or are there better places for my money?

Also I don't understand expense ratios and when they are paid (this may take a piece of all those earnings from the healthcare fund). Best I can remember, the index fund is around 0.10% and the healthcare is 0.81%. Quite a difference. When is that paid... when I take money out or is that already taken each time the fund value is updated?

[warfreak2]

If you wanted reliable returns over the length of one year, you shouldn't have bought stocks at all. Index investing wins in the long term, but 10-20 years even may not be enough.

If you want to beat the average for the market, you have to be able to identify a stock which is incorrectly priced. But stocks are traded by rather a lot of people, at the present market price, which you think is an incorrect price. That means you must know something that all of those people either don't know, or didn't correctly act on.

[foobar]

The ER is taken out of the fund. You don't have to write them a check.

You are looking very short term. 3 months is a blink of the eye for an investor. You need to look at 5+ year results.  Sector funds area  lot more volatile than total index funds. The ups are higher and the lows are lower. There is a huge premium on picking the winners. You health care was up 60% last year. Precious metal funds were down 40%.  Go back 10 year and those precious metal funds were about to explode while health care was giving average returns.

Thanks for the great site and lots of good info. I'm a new investor and started a Fidelity account in December. I put some cash in the Spartan 500 index fund and then about a month later, upon the advise of a friend, put half as much in one of Fidelity's healthcare mutual funds. I realize it has been a bumpy road for the first part of the year, but this index fund doesn't seem to grow much. In fact I'm only $12 ahead right now. In my other healthcare fund that I have half as much invested, I'm $200 ahead. Is my fading love for index funds just because of the rough market so far this year or are there better places for my money?

Also I don't understand expense ratios and when they are paid (this may take a piece of all those earnings from the healthcare fund). Best I can remember, the index fund is around 0.10% and the healthcare is 0.81%. Quite a difference. When is that paid... when I take money out or is that already taken each time the fund value is updated?

[matchewed]

You seem to need to read some investing books. Take a glance through a search for investment books and read www.jlcollinsnh.com (check out his stock series).

These should point you in the right direction for the asked for love.

[GlassStash]

You seem to need to read some investing books. Take a glance through a search for investment books and read www.jlcollinsnh.com (check out his stock series).

These should point you in the right direction for the asked for love.

+1 For Jlcollinsnh's stock series.

"The bogleheads' guide to investing" is also a great read.

[RaveOregon]

How does your active healthcare fund compare to something like Vanguards Healthcare Index Fund? That would be a better comparison

[MaxRules]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

[matchewed]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

Pardon the laughter, it's not directed towards you just the concept of two years not being a short run. HAHAH AHAHAHAHAHAHAHAHHAHAHAHAhahhahahahahhahhhahah... heh

That being said you're going to be investing for 60+ years. Use that perspective and I'd bank on the S&P 500 or even better the Total US Market any day because it takes a broader more diversified group of companies. What if something terrible happens to the healthcare companies, my US total market might register it as a blip, your healthcare fund may be wiped out. Educate yourself further on diversification and risks, ignore pretty charts until you get a better grasp on what they are communicating and how to use them better.

[Abe]

As others have said, it is a matter of defending yourself against significant changes in a given industry. Many of these sector funds invest heavily in a few big players. They may be going strong now, but that isn't necessarily true in the next several years or decades. If you are willing to stomach major losses, then the higher returns are your reward while things go well. That being said, I rarely look at the charts because they can be quite misleading if not analyzed very carefully. Many times the (growth of $10K) charts do not factor tax and fees.

[MissPeach]

You seem to need to read some investing books. Take a glance through a search for investment books and read www.jlcollinsnh.com (check out his stock series).

These should point you in the right direction for the asked for love.

+1

If you are beginning then indexes are a great thing to start with. You can beat fund managers and accumulate more money (because the fees are lower plus returns are usually higher long term).

If you really enjoy reading about certain investments you can more reliably pick smaller pools such as the health care efts your mentioned but you are taking on more risk for that return and could lose more money in the long term.

Having said that I personally do invest in individual stocks too and will keep an eye on certain ones and look for a bargain so to speak (where I feel their price in unnecessarily low). Many times stocks will get hit for stupid reasons that have nothing to do with that company and that is what I personally look for. But this approach takes a lot of time, research, and my returns aren't always above the indexes. I don't do this with all my money though - just 10% of my portfolio. I have 2 accounts I do this in and one I have been able to do 50% gain this year and my other account I was at a 3% loss. If I had put everything in VTi or QQQ I would have made 30-60% this year in that same period. This is not a beginners step IMO.

[MaxRules]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

Pardon the laughter, it's not directed towards you just the concept of two years not being a short run. HAHAH AHAHAHAHAHAHAHAHHAHAHAHAhahhahahahahhahhhahah... heh

That being said you're going to be investing for 60+ years. Use that perspective and I'd bank on the S&P 500 or even better the Total US Market any day because it takes a broader more diversified group of companies. What if something terrible happens to the healthcare companies, my US total market might register it as a blip, your healthcare fund may be wiped out. Educate yourself further on diversification and risks, ignore pretty charts until you get a better grasp on what they are communicating and how to use them better.

That's ok, I wasn't actually saying 2 years is any real length of time for investing, but rather this $1600+ gain over the S&P was not just one of those wild spikes. The Healthcare and Biotech funds have been posting nice gains for 10 years and didn't drop as bad as many did in the 2008 crash.

I understand the long term investing of the index funds. It just seems like it's a slow earner and other funds might be better right now. Anyone have other favorite funds?

[Undecided]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

Pardon the laughter, it's not directed towards you just the concept of two years not being a short run. HAHAH AHAHAHAHAHAHAHAHHAHAHAHAhahhahahahahhahhhahah... heh

That being said you're going to be investing for 60+ years. Use that perspective and I'd bank on the S&P 500 or even better the Total US Market any day because it takes a broader more diversified group of companies. What if something terrible happens to the healthcare companies, my US total market might register it as a blip, your healthcare fund may be wiped out. Educate yourself further on diversification and risks, ignore pretty charts until you get a better grasp on what they are communicating and how to use them better.

That's ok, I wasn't actually saying 2 years is any real length of time for investing, but rather this $1600+ gain over the S&P was not just one of those wild spikes. The Healthcare and Biotech funds have been posting nice gains for 10 years and didn't drop as bad as many did in the 2008 crash.

I understand the long term investing of the index funds. It just seems like it's a slow earner and other funds might be better right now. Anyone have other favorite funds?

Others might be better now, absolutely. Which ones? Nobody knows. And when will the become worse? Nobody knows.

[foobar]

Yep the last 10 years were good for health & biotech. But here is another fund that went on a great 10 year run between 2002-2012(https://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316390780) when it's sector was hot.. Notice how well it performed over the past 2 years.  Health care is a hot sector. How long it will remain so is always a toss up. There is a lot of reason to think it is a growth area and other reasons to think it is going to get reigned in. If you guess right, you can make a lot of money. But your guessing. But buying high is always a risky strategy.

That's ok, I wasn't actually saying 2 years is any real length of time for investing, but rather this $1600+ gain over the S&P was not just one of those wild spikes. The Healthcare and Biotech funds have been posting nice gains for 10 years and didn't drop as bad as many did in the 2008 crash.

I understand the long term investing of the index funds. It just seems like it's a slow earner and other funds might be better right now. Anyone have other favorite funds?

[kyleaaa]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

There's your problem. Stop looking at short-term charts. "Since at least 2012" counts as short-term in investing. Hell, everything less than 20 years counts as short-term depending on who you ask.

Theory and empirical data both agree index investing is the way to go in the long run. You can believe the research or not, but looking at short-term performance charts isn't going to help you make an educated decision. Short-term movements are essentially random.

But you seem to have already made up your mind, so go for it. Move your money around. You'll learn your lesson eventually. Everybody does.

[arebelspy]

Thanks for the replies. I certainly do have plenty to learn about stocks but that's why I'm here. Probably would not have gotten started at all without this site. I realize three months is a short period of time but I'm just going off the charts I read for each fund. I know the S&P index fund I'm in now went up 30% last year even though this year it's flat so far. Other funds went up more and are still going up this year. Fidelity has a chart for their funds as "Hypothetical growth of $10,000". Starting at the beginning of this year investing $10k, the S&P 500 fund would have gained you a whole $15 up to today. Meanwhile the same money put in the Healthcare Fund would have gained you $1616. No I didn't mistype that. SIXTEEN HUNDRED more dollars! Dammit if I only had a future chart. But, that helps to explain my lack of understanding for the love of index funds. Also, that was not just a short run of luck on the healthcare fund, it's been out performing the S&P index fund since at least 2012.

The love for index funds comes from the fact that over the long run they'll do the best.

In the short term this healthcare one may have beat it.

But wait until the month that that's down while the S&P is up. 

Historically over time the indices will beat picking individual investments.

Picture the slow and steady turtle.. some months it's ahead, some it's behind, but eventually it pulls ahead and stays there.  The rabbit will never catch up.