Why are you such big fans of index funds?

If you compare the Fidelity Low Price Stock Fund to Vanguard’s small-cap and mid-cap index funds, you will see Fidelity’s three-year, five-year and 10-year performance leaves the index funds in the dust. Fidelity’s fund is a small to midcap blend fund. If it’s so easy to find funds that do much better than index funds, why do you recommend index funds? If actively managed funds make you more money in the end, you’d be better off rather than worrying so much about expense ratios and turnover. Please answer my question. I am getting different answers from every advisor.


The debate between active and passive management has been going on for decades and will probably continue to do so. In the end, you must decide for yourself what to believe and what to do. I’ll give you my perspective plus some resources that show you why we believe in passive management.

What you have done is very easy. You have looked at the past and determined what you should have invested in, at least in this category of assets. If investing were that simple, everybody would do it, and we’d all be wealthy. The problem is you cannot invest in any past track record. (more…)

Fixed index annuities: Perfect product or a ripoff?

Much of the financial industry is hurting these days, and you can bet that Wall Street is working overtime to hook investors in one way or another. Insurance companies are promoting a product that looks (at least to them) like a winner, especially during tough times.

You can barely pick up a financial publication lately without seeing ads for fixed indexed annuities, often called equity index annuities. The ads promise a lot. But does the product deliver the goods?

Many investors seem to think so. An estimated $26.7 billion went into equity index annuities in 2008, according to AnnuitySpecs.com’s Advantage Index Sales & Market Report. I think there are three main reasons. First, they offer downside capital protection at a time when nothing seems to be working for investors. Second, they seem to offer market-like returns. Third, sales representatives are being paid high commissions to push them.

If you haven’t seen or heard the pitches for equity index annuities, you probably will before long. Wall Street has identified this as a profitable product – profitable, that is, for Wall Street.

The Claims

Here’s what you may be told: With a fixed indexed annuity you get a guaranteed minimum rate of return or the return based on an underlying stock index, whichever is higher. What could be nicer? Upside potential and no downside risk. Wall Street would like you to believe that finally somebody has devised a product that’s on your side all the way.

Technically, the claims are accurate. If you wait long enough (think about up to 16 years), you can get all your money back plus some return. However ……. (more…)

Please clarify tax-managed vs. tax-deferred

I am not sure I understand the difference between your tax-managed portfolios and your tax-deferred portfolios. Does tax-advantaged just mean using index funds? I have an all-equity taxable portfolio at Vanguard that includes large, small, international, growth, value and REIT funds. I’ve got at least 20 years before I can even think of retiring.


This is a good question, which allows us to clarify something we might erroneously assume that everybody understands. And the answer isn’t complicated.

A tax-deferred account is one on which you do not have to pay income taxes until you take withdrawals. Common examples include variable annuities and traditional IRAs as well as traditional 401(k) and similar employee accounts. (Our tax-deferred recommendations also apply to Roth IRAs and Roth 401(k) accounts, which are different in that the owner won’t ever be asked to pay income or capital gain taxes).

A tax-managed account is one that doesn’t have any tax shelter. In these, capital gains and income are subject to taxation in the year they are received. Such an account can be held in single or joint ownership or owned by a trust or a business.

Our recommendations are different for these accounts because of the taxation issue. (more…)