We know that index funds which mirror the index of the stock market can grow your money. The reason is all indexes change over time – some every 6 months the indexes drop the losing companies and replace them with companies do better. That simple strategy overtime means the stock market index will go up, but not necessarily in a straight line. The knowledge of how index funds work means the biggest funds in the world are now index funds and that is a good thing. Ben Steverman writing for Bloomberg News spent sometime with the managers of the Vangard funds to see how they ae managed? Index funds are called passive funds, but are they?

In the example of Vangard Group, the fund manager is Gerry O’Reilly who is responsible for the management of $800 billion in assets. Money flows in (which is a good thing) and when mergers and acquisitions happen they need to be accommodated. To earn extra money things such as lending shares to short sellers are done and smart trading. As you would expect much of the trading is done with the help of technology and risk software, the tough decisions are made by portfolio managers. What do you do with illiquid stocks? what to do with new classes of stock? Mergers and Acquisitions can be and are structured for the best method to the client not necessarily for the investors which means there are multiple methods they are done. The good news is good people and a team of people are needed to run the funds effectively. To keep the basis points similar to the index, takes decisions by people.

Linking to dividend paying stocks, similar to index funds over the long term they should grow as long as they continue to be profitable and can pay their dividends. It takes people to decide which company is better and why the companies should remain profitable? The stock market only has perfect information about what has happen, no one knows what will happen however most profitable companies have lots of parts to them but they must continue to endure through changes in the economy and changes in people’s lives. The fund managers seemingly have greater access to knowledge, you need to keep your investments as simple as possible. How does the company make sales? what are the margins? what are the profitable items? who is the competition? how does it not make money?

There are more questions than answers, till the next time – to raising questions.