What funds would you recommend for a young person?

[matjone]

Say there was a young person in your family who just got out of school, is earning money at their job, and wants to invest some of it, but has no interest in learning how to invest it for themselves.  Where would you recommend they put their money?  If you want you can just say "index funds" but ideally I'd like to get some idea of who you consider to be the best investors.  If you'd rather recommend a holding co such as FFH or BRK then that is fine too. Thanks,

[Guest deepValue]

VFINX. There's really no point in making the observation that the majority of mutual funds under perform the S&P 500 if you're just going to ignore the corollary.

 

BRK should do a little better than the market over time, but then you're teaching your kid to act on stock tips.

 

There are certainly some good managers out there; Bruce Berkowitz is one. But, as we saw with Berkowitz, success attracts capital and more capital often results in lower returns. I'd stick with a plain vanilla index fund if I were you.

[eclecticvalue]

Is that young man goes by the name of matjone??? Jk

 

I would recommend Goodhaven and one of Joel Greenblatts value index fund.

[Palantir]

Fairholme? Goodhaven is a good option too.

[Kraven]

The Madoff family of funds is excellent.

[mikazo]

I'd probably recommend some kind of dividend aristocrats index fund. That way you get the benefits of an index fund with additional income, which can help people psychologically to stay invested during downturns, if they still see money coming in despite declining prices.

[LC]

The Madoff family of funds is excellent.

As the recent article regarding Klarman showed, purchasing Madoff claims was very profitable :)

[matjone]

I am pretty far off from being young, but thanks.  This is more to help me build up my list of people to follow and possibly invest with in the future.

 

As for VFINX, I'd be more inclined to invest in say 3-5 funds who have a value philosophy and who have a good track record, than to invest in vfinx at 17x earnings.

[Packer16]

I would say invest with someone doing something different than broad diversification of large stocks (as many folks do that).  Some examples would include Fairholme and individual firms like BRK, JEF/LUK and FFH.  I would be careful in purchasing diversified value funds as even the best (like Longleaf) have had a hard time beating the market because of their diversification of average ideas with the best.

 

Packer

[Ross812]

I would recommend Yacktman funds. Donald Yacktman has a value philosophy and has been at the game for a long time. His son is equally good and I would expect the outperformance to continue over the long term.

[fareastwarriors]

Sequoia Fund is a solid choice.

SEQUX

[ourkid8]

I would definitely invest in Chou Funds as I have in my personal account. (I own a large stake in Chou Associates)  Francis is one of the most ethical individuals who actually refunded his management fees due to poor results in his Chou Europe fund.  In the investment world, that is unheard of.  Now on a returns perspective, since inception of Chou Associates,(Nov 28, 1986) he has returned 10.8%. 

 

S

[Guest wellmont]

sequoia.

[plato1976]

10 yr alpha against SP500 is "only" 0.79%  ?

maybe the glory is no longer there

 

 

sequoia.

[west]

If this individual has *no* interest in learning about investing or how it works, as much as I hate to say it, an index fund (ETF) is probably the best choice.

 

First, he won't have to worry about annual tax bills if he goes with an ETF, like he would with mutual funds.  The effects of no tax over a long time can compound to an awful lot of money.

 

Second, he, his potential future or current spouse, or an outside investment manager will never have to worry about what the fund *really* is or if it will *really* outperform like it's supposed to.  This, for your typical person, is worth more than the outperformance they could receive if they were invested in an "above average" fund.

 

 

[Guest wellmont]

10 yr alpha against SP500 is "only" 0.79%  ?

maybe the glory is no longer there

 

 

sequoia.

 

more to the picture. 5 year alpha? :) they take way less risk than the index. less risk. higher return. me likee.

[fareastwarriors]

If this individual has *no* interest in learning about investing or how it works, as much as I hate to say it, an index fund (ETF) is probably the best choice.

 

First, he won't have to worry about annual tax bills if he goes with an ETF, like he would with mutual funds.  The effects of no tax over a long time can compound to an awful lot of money.

 

Second, he, his potential future or current spouse, or an outside investment manager will never have to worry about what the fund *really* is or if it will *really* outperform like it's supposed to.  This, for your typical person, is worth more than the outperformance they could receive if they were invested in an "above average" fund.

 

A basket of low cost index funds easily beat most managers. Low stress, just keep dollar averaging in.

[Packer16]

The only concern I have about indexes is as they become more popular as they have they will lag in performance even more they have to.  The higher demand will push up the premium of the securities in the index until the last index buyer arrives then they will underperform.  The question is will they underperform greater than the difference in fees.  Historically, this has not been the case. 

 

I guess another perhaps more important question for the young man is how will he react to downturns.  I think more money is lost when shareholders sell at the bottom versus difference in the index actively managed funds.  Just observe the investor vs. NAV returns on mutual funds per Morningstar.  For the Vanguard 500 Index it ranges from 115 to 250 bp per year from 5 to 15 years and for Fairholme it ranges from 160bp to 750bp.  These numbers are typically in excess of the differences in fees.  So he needs to adjust his allocation to where he is comfortable with the loss levels.

 

Packer     

[matjone]

How big of a problem do you think this is for ordinary folks?  Obviously a lot of money moves out of the market during panics, otherwise there wouldn't be a panic.  But the people I am friends with who are engineers, accountants, etc.,  who just blindly contribute x dollars per paycheck into a 401k or whatever, I don't think they are panic selling.  I bet all of my friends were net buyers throughout the crisis.

 

Thanks for all the replies.  The list that I have built up includes Chou, Fairfax, Berkshire, and Berkowitz.  I will keep looking for more. 

[Packer16]

Based upon the investor returns from mutual funds this is the biggest problem.  If some of your friends are immune to this influence then great but I would make sure that this is the case as most people are not .  The worse position to be in is to think you are immune when you actually are not.  Being honest with yourself will save you time and stress.

 

Packer

[matjone]

Yeah, I have never sold in a panic, but I have sometimes found it hard to buy in during one.  Of course I don't know for sure what my friends are doing, but I find it hard to believe they are selling out during panics.  I know that before I started getting interested in investing I basically never thought about it.  I just contributed to the plan and never touched it.  I have an idea that most middle class and upper middle class people who are under 55 or so invest like this but I could be wrong.

[wknecht]

You've already noted BRK on your list, but I'll put in another plug anyway - I don't think it's too far fetched to think of BRK as an "index fund" that (with a little insurance leverage) has been hand-picked by arguably the greatest investor that ever lived, and moreover is trading near prices that that same investor is a buyer at.

 

Not that it will give specific fund advice, but if your friends/family haven't read it already, they might find Graham's discussion of "defensive investors" in the Intelligent Investor (chapter 5) useful.

[boilermaker75]

What about SPX and DIA and dollar, or value, cost average in?

[txlaw]

I've recommended FAIRX and FAAFX in the past to some friends who are business savvy.  But be warned -- even the most business savvy folks can't handle volatility, and given the volatility of Bruce B's funds, these may not be the best choice for friendship's sake.

 

Yacktman is good. 

 

Sequoia, naturally.

 

Maybe Dodge and Cox?

 

There's always BRK and FFH.

 

I've actually recommended being overweight the Vanguard value ETF and the Vanguard financials ETF to a colleague who prefers low cost indexing.

 

Most of the time, I just tell people to index (with Vanguard) and collar cost average -- and be consistent about it.

[Sullivcd]

What about RSP? The concept of equal weighting makes more sense than cap weighting to me.