Felix Salmon responds to Swensen’s anti-mutual-fund piece

Felix Salmon, a widely published financial journalist, responds to Swensen’s article about how much of the mutual fund industry is ripping off investors.  In particular, he takes issue with Swensen’s suggestion that the SEC should be somehow pushing folks to buy index funds.

http://blogs.reuters.com/felix-salmon/2011/08/19/why-the-sec-shouldnt-push-index-funds/

Salmon grudgingly seems to agree that *within an asset class* it may make sense to buy a cheaper fund, but he reiterates the same point I made yesterday (and which was glossed over by Swensen) that it’s only within a given asset class.  It makes no sense to compare a low-cost money market fund to a high-expense equity fund.

It’s worth the read, and there’s something to be said for keeping the SEC out of the area of pushing specific products such as index funds.  But it ignores the larger point, the fact that investor returns have been very sadly out of step with reported mutual fund returns (because fund investors don’t typically all own the fund over the whole life of a given fund and fund investors seem to have a bad habit of buying what has already done well, not what’s poised to do so.

Then Salmon goes on to say how putting high expenses in his own way keep him from doing bad things – by using a high-cost broker, he convinces himself not to trade too much because of those expenses.  The same argument has been made for high-transaction-cost ‘A’ share mutual funds, and it’s just as silly an argument here.  Letting the air out of your tires will also keep you from speeding, but it has the side effect of making it a lot less likely you’ll ever get where you’re trying to go.

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