Bill Miller's Legg-Mason Fund

The numbers are out. Over the past decade, Bill Miller, the once-esteemed fund manager of the Legg-Mason fund, has trailed the market by a several percent per year. Throughout the 1990s, Bill Miller became one of the darlings of the fund industry, constantly churning out returns that stomped the market at-large. Regarded as a financial genius, Bill Miller acquired almost $1 billion in his fund. Now, the pendulum has swung in the other direction as the stocks that Bill Miller has purchased have fallen out of favor.

Not only does this demonstrate just how quickly yesterday's stars can turn into today's burnouts, they also demonstrate the futility of trying to time and beat the market. If Bill Miller, a very intelligent man who had beaten the stock market for over a decade and a half, can lose his prowess and start underperforming the market, then what basis does the average investor have for thinking that he or she can achieve market superior returns? Of course, the right answer is that low-cost index funds, such as those found at Vanguard, are the safest way to bolster your retirement savings, as your general returns will be quite similar to the overall market, minus the frictional expenses. Robert Wasilewski over at RW Investing wrote a great article on Bill Miller's falling out of favor in the fund industry, and I highly recommend that you check out his article here: http://rwinvesting.blogspot.com/2011/07/legg-mason-10-year-results.html .

How To Find A Good Mutual Fund

When I was in high school, one of my teachers only had a handful of rules, and they were all 'don't's.' He would tell us 'don't forget to do your homework, don't get a girl pregnant, and don't forget to show up for class. And don't take too many bathroom breaks.' While a classroom with a bunch of 'do nots' may sound like a depressing place to be, it was actually quite liberating. As long as we didn't do a few things he forbid, we were in the clear. Likewise, when we're buying mutual funds, we should keep in mind a couple things that we should avoid.

First of all, we shouldn't think that buying 5, 10, or even 15 funds ensures diversification. It all depends on the type of funds you're buying--if you're buy 15 international mutual funds, you're going to be far less diversified than someone who buys an American fund, a bond fund, and an international fund. So quantity doesn't matter unless you're diversifying across asset classes.

Likewise, you should avoid mutual funds with high fees. Often, they don't meet your initial expectations--many even lag the market! And when you factor in the 2-3% expense cost of some of the more expensive funds, then you don't even have much of a chance of earning market average returns, let alone market beating returns. My Money Blog has put out some great posts about the type advice that you should avoid when looking to purchase a mutual fund: http://www.mymoneyblog.com/how-not-to-select-a-good-mutual-fund.html

Low-Cost 401(k) Provider

One of the greatest indicators of investor returns in the stock market is the amount of money that each investor spends on account expenses. And this is mostly intuitive. If you pay 2.1% in annual expenses on your 401(k), then your mutual funds and other investments will have to beat a generic stock market index fund that only charges 0.1% by a full two percentage points. And this is difficult for most mutual funds to do. And yet, this is the selection facing most 401(k) investors as they try to decide which investments would be the best for their portfolio. Generally speaking, Vanguard has a reputation for running the most cost-efficient funds in town, often charging 0.1% for their index funds. This gives the investor a tremendous advantage, as his returns will essentially reflect those of the overall market at-large. So the moral of the story in 401(k) investing is this--look for the lowest cost options that your provider gives you, and if you want to pay up for a more expensive fund, make sure you have a reasonable expectation for believing that the fund will exceed the returns of the overall stock market. To check out a great article on this topic, be sure to check out Allan Roth's article at Money Watch, link here: http://moneywatch.bnet.com/investing/blog/irrational-investor/best-small-company-401k-provider/3693/

Why Your Money Manager Can't Beat An Index Fund

There are so many reasons why money mangers can't even beat the average return of the stock market. They charge annual expenses that are grotesquely higher than simple index funds, they experience high turnover, they mismanage accounts, they make big bets that don't pay off, etc. But Alexander Green at Wall Street Daily points to reasons how the manager mangers try to escape scrutiny for their relatively poor performance. Because there is a strong incentive for money managers to make it look like they are beating the broad stock market (otherwise, why would you invest with them?), and often, they have to mislead investors in order to do so. They compare their performance to the stock market (without including reinvested dividends), and they resort to other low-brown tactics to try to enhance their record. Of course, this does a huge disservice for the average investor who is paying the higher fees in hopes of beating the market over the long haul. Because the interests of money managers are so skewed, you would be wise to do your homework and follow-up on the claims of your money managers to see if they are trying to unfairly portray their investment results in a better light than is deservedly so. If you want to read Mr. Green's Wall Street Daily article on the subject, visit here: http://www.wallstreetdaily.com/2011/06/30/money-managers-not-beat-market/ .