January 21, 2003

The Fool.com, Indexing and Me
by Marcel Chartier

Ok, first I want to say that if it wasn’t for the fool.com I probably would not have understood some of the basics of investing. They provide a very good basic education for the new investor. Although, they now charge to participate in the community ... which is ultimately why I am no longer there. I think it discourages new investors from learning and contributing and ultimately leaves less diversity in communities - and I think that is a bad thing. It also creates the community guru effect, also discussed in my understanding the media article.

But, I digress. The reason why I decided to write this piece is that there was always one incongruity that drove me crazy in regards to the fool. That incongruity was that they espoused indexing as a good way to achieve “better than average mutual fund” results, stating that the average mutual fund did not beat the market and by purchasing the index through a index fund, or a index unit (something that mimics the stock market index ie. the TSX composite or the S&P 500), you would save money on fees and at least match the market in performance. Makes sense - at first glance. Then you look at the community and board postings and you have a huge number of people discussing and buying individual stocks and chanting the mantra of “due diligence”- good research and investigation before buying a stock.

What about due diligence before buying a mutual fund? Wouldn’t that make sense? Look into the funds history, who the manager is? What their style is? The fund manager’s past performance, current plans, portfolio and opinions. Study the companies in the portfolio to learn more about the fund’s strategy - due your due diligence on the fund! Some funds have done incredibly better than the market after fees for years!

In addition, there are sites out there that almost give professional level information about fund performance, history and held assets - try globefund.com or morningstar.ca. Its always helpful the know in advance what kind of performance a fund has had before you invest. Your advisor says put your money into XYZ fund - look it up first, then get back to him. Or, pre-filter what funds you what to discuss before talking to your advisor.

The more you double check the better. You can also track your funds performance in comparison to others, realizing of course that different funds have different patterns of growth - discuss this with your advisor too. This way you have a better idea of why a fund may be underperforming or performing well. You may feel like you have lassoed a rocket after you have selected a surging fund or stock - but if you know the fund pattern is to surge then drop (like sector funds) then you won’t be surprised when the rocket drops. Do your fund due diligence. Out of the over 3000 Canadian funds out there they only may be a few hundred that are truly “great funds”.

Well, enough about the fool.com, indexing and me.