Index Funds for Safety?
Posted on May 18, 2011
Filed Under 401K, Investor Mistakes, Mutual Funds, Personal Investing, The Economic SceneIn general, financial journalists at the major newspapers do a decent job. In general. But every once in a while they come to a misguided conclusion. Ron Lieber, in his New York Times column of 5/13/11, made a case that index funds should be on the menu of all 401(k) plans. Most plans do not currently offer index funds and he says: “These 401(k) plans lack index funds even though their low expenses and breadth make them the very definition of cheap and risk-conscious.”
He got it half-right. Index funds (mutual funds that do nothing more than mimic a specific market index such as the S&P 500) indeed are cheap, thanks to their low expense ratios. But risk-conscious? Aside from the fact that the term is a bit vague, he clearly was trying to make the case that traditional “actively-managed” mutual funds – the kind we use almost exclusively here at Weber Asset Management – can be riskier because some managers may concentrate the portfolio among a small number of stocks.
While Lieber’s point is reasonable (and I’ve heard others make similar claims), he fails to mention that avoiding excessive risk is precisely what good mutual fund managers attempt to do. They assess the investment landscape and they shift assets as conditions change.
Contrast that with pilotless index funds which must go up and down with their market benchmark, unable to make the slightest attempt to sidestep trouble. Or, for that matter, take advantage of improving conditions.
Index funds make sense for some people, some of the time. But please don’t think you are reducing your risk if you buy them.
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