Friday, September 07, 2007

 

Hope Is Not a Strategy

Every week I get a newsletter from John Mauldin in which he or one of his guests comment on the markets and I have found everyone of them insightful but this weeks letter takes the cake. It is a clearly reasoned treatise on future expectations and a wonderful idea in fund investing called fundamental indexing (FI). FI combines the consistency of index fund investing with the additional power of adjusting the index based on some fundamental measure of value; i.e. dividends or earnings.

Traditional indexing just holds onto the names in the index which gives an investor the same returns as the index. One problem with this is that hot names are the stocks that get added to the index and they only get dropped when they aren't hot any more. Why not sell off some of the hotter issues and buy some of the weaker to balance against this? That is what a FI fund will do.

I found this article so useful I am not going to quote it because I want you to read it for yourselves.

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