Discussion question
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Discussion Questions
Question 1: What implications do you draw from the graph for mutual funds?
Bruce (2003) asserts that the ability to pull resources together in purchasing shares, bonds, or other securities through mutual funds has helped investors achieve their retirement plans and financial goals more conveniently than never before. The initial implication from the graph indicates the progressive performance of different funds over time. As such, investors have the opportunity to choose their investment plan based on their analysis. It is evident from the graph that the level of investment determines mutual funds’ performance over time. That is, over the last decade, actively managed funds have consistently outperformed low fee index funds. Based on the graph, the performance of the Vanguard 500 Fund is considerably low in comparison to the equity mutual funds. An investor is more likely to attract substantial investment returns on equity mutual funds than the Vanguard 500 Fund. However, deciding to invest in the Vanguard 500 Fund does not necessarily mean that an investor will lose his capital because the investment can still realize growth but on a smaller scale compared to equity mutual funds.
Question 2: Is the graph consistent or inconsistent with market efficiency?
Bailey and Lopez-de-Prado (2013) argue that the main aim of investing capital in the market is to generate more profits in return. In addition to attracting profits, market investors also try to increase their market shares and outdo their immediate competitors. Wilmott (2007) asserts that market inefficiency results in low investment returns and creates very high investment volatility. The high market volatility slightly impends the market approach resulting in the change of market efficiency in terms of production of goods and services. Contrarily, in case the market became less efficient, investors would not be in a position to obtain accurate information on market issues and would thus attract low benefits in the market. Ross and Westerfield (2013) argue that the market’s unpredictability negatively affects the rate of market investment. That said, it can be argued that the graph is consistent with the market efficiency curve because diverse investment portfolios compete efficiently in the market. Owing to the high profitability attracted by the equity mutual fund, it is logical to conclude that the market is efficient because high market returns are only achievable during low market volatility. An inconsistent graph in which the market forces is marked by an irregular line that presents difficulties in predicting investors’ market trends.
Question 3: What investment decision would you make for the equity portion of your 401(k) account?
The best investment decision that I would make is to buy individual stocks by rolling over some 401(k) accounts. There is a likelihood that this investment will attract considerable returns because of the investor’s sizeable account balance to the company’s 401(k). Based on the historical performance, it is safe for the investor to gamble with some portfolio investment since they are reasonably doing well. In this situation, the investor can achieve a high yielding portfolio if he rolls over more funds to the equity mutual fund. Even though equity mutual funds attract high fees, it is still profitable compared to Vanguard 500 since the anticipated returns will effectively cover for the initial high fees involved.
References
Bailey, D. &Lopez-de-Prado, M. (2013): “The Strategy Approval Decision: A Sharpe Ratio Indifference Curve approach,” Algorithmic Finance 2 (1): 99-109
Bruce J. F. (2003). Investment Performance Measurement. New York: Wiley
Ross, S. R., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). NY: McGraw-Hill.
Wilmott, P. (2007). Paul Wilmott introduces Quantitative Finance (Second Ed.). Wiley