The stock market has risen roughly 20 percent a year, compounded, since 1982, and 80 percent over the past two years. That’s measured by Standard & Poor’s index of 500 stocks, with dividends reinvested.
Have your mutual funds and stock portfolios done as well? Probably not. Most professional money managers haven’t been beating the market, over time. Amateurs almost certainly aren’t (if they’re measuring their total returns correctly).
There’s a simple way of hitching into market returns. Do it by buying an index fund.
Index funds own all the stocks (or a proxy for all the stocks) in a particular market index for example, an index for big stocks, small stocks, international stocks or emerging markets. They rise and fall roughly in line with that market, minus modest annual fees. You can build a diversified, high-performing portfolio using index funds alone.
But the money management gurus stand ever ready to undermine indexing’s success. Their current attack calls the strategy a mere self-fulfilling prophecy. Here’s what they’re saying: When money pours into S & P-linked; funds, as it’s doing now, the S & P; stocks have got to go up but that’s a bubble that’s bound to burst.
“Classic bathtub logic,” snorts indexer Rex Sinquefield, co-chair of Dimensional Fund Advisors in Santa Monica, which offers a wider range of indexes through investment advisers. “You get in, the water rises; you get out, the water drops.”
If indexing were driving the average, he says, all the S & P; stocks should have risen by the same relative amount.
Instead, the most prominent, high-earning stocks have galloped ahead meaning that active managers are buying them, too. Any bursting bubbles will soak everyone.
How about the safety-net theory? Index funds may do better in rising markets, money managers say, but only because they’re fully invested with no cash reserve. “Real” managers should shine when the market drops, because they’re holding a cash cushion and can sell declining stocks.
But there’s no guarantee that these managers will sell in time. General equity funds fell almost as much as the S & P; in the 1987 crash, and fell further in the awful bear market of 1973-74, says Gus Sauter, managing director of the Vanguard index funds.
Besides, the broad market rises two-thirds of the time. If index funds outperform on the upside, why not buy and hold?
The managers who feel the most certain of beating the index are those who invest in markets said to be inefficient that is, markets with lots of great, “undiscovered” stocks. As examples, they cite smaller stocks, both here and abroad.
Managers also might earn their keep by making smart asset allocations. Good international funds have avoided Japan in recent years, says Chip Wendler, vice president of the fund group Rowe Price-Fleming International.
But are these markets really inefficient? The funds that buy small and emerging-market stocks do indeed stand up better against the indexers than big-stock funds do, including big-stock European funds.
Over the past three years, 50 percent of the managed small-stock funds beat the similar Vanguard small-stock index fund, as did 51 percent of the managed emerging markets funds.
That’s pure chance, of course but at least the managers have a shot. In the big-stock world, the odds are against them. Just 7 percent of the managed U.S. big-stock funds managed to beat Vanguard’s S & P; index fund over the past three years. And just 12 percent of the managed European funds came out ahead.
Dull past performance has turned a lot of investors away from international mutual funds. But this year, European funds are up 21 percent, compared with 16 percent for funds linked to the S & P.; Good indexers diversify, with funds linked to every major market. You never know when the game will change.
Last month, I told you about a bill in Congress that would let doctors raise the fees they charge Medicare patients. It’s sponsored by Sen. Jon Kyl, R-Ariz., and Rep. Bill Archer, R-Texas.
Kyl has responded to me in print, saying that his bill does no more than give Medicare patients their freedom again.
Please. Gimme a break. Here are the facts:
Doctors in the Medicare program can’t charge patients more than Medicare allows. Prior to Jan. 1, this also applied to doctors who weren’t in the program. If they accepted a patient covered by Medicare, they had to follow Medicare’s billing rules.
Medicare has a fixed rate for every service. Under federal law, doctors can charge no more than 15 percent above the Medicare rate (some states set lower limits). For services not covered by Medicare, however, doctors can charge whatever they want.
Kyl’s bill would let doctors stay in the Medicare program, yet charge you personally for various services. If your doctor billed Medicare for a treatment, Medicare’s price limits would apply. If the doctor billed you privately, the price could go higher. Under present law, doctors can’t impose charges for “office paperwork” or “phone consultations” on Medicare patients.
Kyl says the same would be true under his bill. But not according to lawyers at the Health Care Financing Administration (HCFA), which manages Medicare. “Nothing in the bill would prevent a doctor from imposing separate paperwork fees on Medicare patients,” says HCFA spokesman Christopher Peacock.
Kyl also claims that, under current law, the government can stop you from getting needed treatment when your “health or life is on the line,” even if you’re willing to pay for it yourself. That’s pure baloney.
Medicare covers a long list of critical medical services. If a service you want isn’t covered, you can pay for it out-of-pocket. If a service is covered but Medicare decides you don’t need it, you can still pay for it yourself.
Kyl’s “health or life” line is scaring seniors unfairly. If you agree, ask your senator and representative to oppose this bill: S. 1194 in the Senate, H.R. 2497 in the House.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.