In praise of Index Funds.

Maybe the smartest move we ever made financially was to move our retirement assets to an index fund.  Frankly we did not wise up early enough and did not catch the full lifetime benefit of doing so.  But as we say read our blog and learn from our mistakes so as to avoid doing it yourself. Anyway this week gave another prime example of why buying managed funds is mostly for fools. 

If you tuned into any financial television this week or read anything business related on the web you have heard the name Alibaba.  Alibaba is basically the Amazon of China with a few twists.  Anyway the IPO of the security happened Friday and some guy named Jack Ma got really really billionaire rich from his business.  Some others like Yahoo got some cash as well since they were early investors. However here is the rub on Alibaba and how it makes clear buying managed mutual funds is not smart. 

Alibaba stock is well not really stock, it is a security based in some Caribbean island where the American depository shares are being held for shareholders.  The real shares are being closed held by people in China and they are the controlling shares.  See China will not allow some businesses in China to be held or controlled by people who are not Chinese.  There is also the concern about just how well they books are kept over there too. Frankly we are not sure if Americans and American mutual funds who bought Alibaba even own anything other than some notes that say something to that effect.  Shareholders in American have no voting rights, no shareholder meetings, no nothing as they say. Take that and consider that almost every managed mutual fund out there bought into the shares Friday and if not Friday will be doing so these next few weeks.  Wonder why? 

Well buying Alibaba makes your fund LOOK smart, makes fund shareholders THINK you are smart, and looks real good when fund reports are sent out.  Honestly we have no idea where the assumed shares are headed.  They started at $70 or and moved up some Friday, but trust me those early shares you could not have bought.  Those shares were for some of the special people who get dibs on buying IPO's and they themselves will wait an SEC approved time and sell them for a quick profit. The point there is the slow rabbits in this stock have already been caught. Mass hysteria is what pushed the shares up in our opinion. But then again we did not buy and will not be buying them. 

We will rest easy and sleep nightly knowing our assets are in safe growing index funds where we ride the economy and steady compound growth. We suggest you do likewise.