I got some statements from fanlain
's IRA earlier, with a listing of the mutual funds she's invested in. So I spent some time looking up various stats on the funds, including their overhead rates. I'd heard a fair bit in the past about how mutual fund performance over the long term is worse than an index fund, because most fund managers can't beat the market by much, and when they do, it's eaten up by overhead fees. I spent some time trying to find evidence of this fact. Of course, as I would expect, all the funds on the list are less than 5 years old, so it was hard to think about long-term performance. But the bulk of money is in a fund of funds, and the constituents have been around for longer. Looking at the history of one of them, it underperforms the S&P for some periods (e.g. the last 8 years), but going back to the start of the fund, about 15 years ago, the annualized return is nearly a percent higher than the S&P. So that's somewhat reassuring.
Of course, seeing as "past performance is not an indicator of future results," this whole exercise was meaningless. Assuming I believe (and correctly understand) the efficient market hypothesis, the most likely reason that this return has been better over this time period is pure luck, and it doesn't make it any more likely that over the next, say, 30 years, the returns will be better than S&P. So it stands to reason we should move that money into an S&P index fund instead.
On the other hand, the mutual fund does
seem to be performing relatively well. And then there's the fact that if everyone
moved their money to index funds instead of mutual funds, the market would cease to be efficient. So part of me just wants to let the money be. Have any of you faced this dilemma? And which way did you go?
Another thing I've been thinking about is mortgages. And here's something I found confusing. Interest rates these days are low — not as low as a year ago, but still quite small by historical levels. So let's say that I have a mortgage at a 6% interest rate. Since mortgage interest is tax deductible, the effective
rate (in my tax bracket for this year) is only 4.32%. On the other hand, a CD with ING Direct can pay up to 4.70%. So if I have any cash surplus, thought I, it would be to my advantage to put it into a CD, rather than pay off the mortgage, since the interest I'd be gaining from the CD is more than I'd be paying for the mortgage.
As I was writing this, I realized a small kink in this plan, since the 4.70% interest I'd be earning would itself be taxed, and I'd only see a 3.42% return. But if I were to invest in something slightly more risky, it's not hard to envision a higher than 4.32% rate of post-tax returns, especially if I can manage to have the investment taxed as capital gains instead of income.
So by this calculation, a 6% fixed-rate mortgage seems like a very good deal for me. And so my winning strategy would be to get the longest-term loan possible and pay it off as slowly as possible (at least as long as the mortgage tax deduction exists.) But I'm wondering if there's something else I'm missing.