Dear Friends and Family,

After a bit of a roller coaster month, we have some exciting news. For the seventh year, Sue has won the 5 Star Professional Seattle Wealth Manager award. She was one of 2452 nominated professionals, of which, 266 were named after a thorough review including regulatory, ethical and legal research was completed. More information about this award can be found at:

This month we wanted to discuss Index Funds; a hot investment vehicle. They’ve been gaining popularity, especially among some of the younger investors that Amanda has been working with.

We wanted to outline some features that are not common knowledge:

1. Index funds overweight overpriced securities and underweight underpriced securities. This occurs automatically when capitalization-based weighting of holdings is applied.
2. Index funds overweight large company’s and underweight small company’s securities. This also occurs automatically due to capitalization-based weighting of holdings. This is a negative because historically small companies outperform large companies.
3. Index funds readjust their portfolios. Usually this occurs when securities that declined are ejected before they can recover and new additions that have been outperforming are added before they readjust to the mean (added at a high point).
4. Index fees are low per share but are high per best ideas. There are a lot of shares within a fund, so that fees, when calculated per share, are low. However, there aren’t all that many great ideas within a fund, so fees per good idea are high. The 20 best ideas portfolio might be a better use of fees.
5. Holding an Index fund subjects you to the transaction costs involved by the continuous buying and selling of other fund holders.
6. You will own securities of companies you will not like. It is ironic that employees of NIH own Tobacco stocks in their Government sponsored retirement index funds.
7. Some Index funds lend their securities to other firms for a fee. Sometimes this turns out to be a risky source of earnings.
8. Perhaps most importantly, whenever a large amount of funds flow indiscriminately into any area of the stock market, there usually is a painful correction.
9. Finally consider the rates of return. For a 20-year old, a single investment at the 10% market index returns of the last century, would provide 100 times their investment at retirement. At 11% that is 200 times and at 15% it is 1,000 times. We certainly feel it is worthwhile to try to outperform the indexes.

It is for these reasons we have chosen not to recommend these funds in our portfolios.

If you are in index funds in your 401k we are happy to review your other options.

Katz Family Financial