Class Discussion/ Chapter 5

Class Discussion Notes

• statistics show that actively managed funds have less a chance of being successful
• Morning star 5 star funds: top 5 actively managed funds based on their performance over the last 5 years
• elephantiasis: when funds have too much money and not enough ideas, has to become less picky in order to invest all the money flowing in
• lower the cost associated with an actively managed funds, the higher rate of success it has
• but financial investors will push for higher cost funds because they earn more money
• average fund manager has barely more financial education than I do know
• No scholarly argument against index funds
• however there are several fund managers that are able to beat the market and earn more money than the index funds

• Rear-view mirror revelation: It's easy to comment on something that has happened but very hard to predict what will occur

• Couch Potato Portfolio Concept: 
• when you buy or sell your stocks to keep your index at a set percentatge
• be greedy when others are fearful and fearful when others are greedy
• Eg. Scott Burns- 1991
• a portfolio comprised of 50% US stock index & 50% US Bond Index

Chapter notes:

• total stock market index funds are good, but it doesn't represent a balanced portfolio
• bonds act as parachutes when the stock market does poorly
• Bonds:
  ·        Don’t make as much money as stocks
  Types:

  ·     Safest are the first world bonds

  
  

  ·    In short-term Gov Bonds

  
  

  ·    In short-term Corporate Bond

  
  

  ·    Short term- because inflation can eat away at your money 

  
  Bond allocation that is roughly equivalent to your age your age – 10
  
  
  
  
  
  
  
  

  ·        Riskier Bonds pay higher interest, but they could forfeit on the loan 

  
  

  ·       If you go the full duration of the bond (lets say five years)

  
  

  ·       Gov guarantees your money back with a fixed interest rate    

  
  

Home Discussion:

       Tonight we discussed how most of my parents portfolio is in bonds, rather than stocks.  I learned because my parents would rather have a stable amount of money to fall back on than earn a lot of money.  And my funds have been invested in actively managed funds, and we agreed that after learning that index funds have a higher probability of earning me more money, that is it time to switch to index funds.