Dear Dagen: Readers Debate Best and Worst Fund Trends - TheStreet

Dear Dagen: Readers Debate Best and Worst Fund Trends

Also, end-of-year predictions and index funds vs. Spiders.
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Ever since I read that

Aristotle Onassis

had some bar stools upholstered with the foreskin of a whale, I've come to accept that people have different opinions on what is trendy and what isn't.

So I wasn't shocked when I was hit with some dissenting opinions on my Tuesday

column highlighting best and worst trends in the mutual fund industry.

In the spirit of free expression, I'll print some reader's opinions, even if they make as much sense to me as Ari's furniture selection.

"I'm afraid tax-efficiency may not yet be a trend. I'm not sure there is even an embryo yet," writes

Ron Guest

. Growing tax-awareness was one of the trends I praised. Perhaps prematurely.

"Monday I called

T. Rowe Price

to ask about the capital distribution date for a fund I was considering making an initial investment in. The rep didn't want to tell me and launched into a long spiel about how there was no adverse consequence to buying immediately for a large distribution!"

"When I insisted on getting information, all I could get was the expected month of distribution. He would not tell me the current turnover rate or the current undistributed gains for the fund. And, as you pointed out today, the published information is so out of date as to be useless."

Maybe I got ahead of myself on that one.

Pai Hwong

challenges my glowing review of index funds and the notion that these passively managed funds are easy investment decisions.

"I think some index funds are actively managed to an extent," Hwong writes, pointing to the

list of guidelines that

Standard & Poor's

follows when adding stocks to its 500 index.

"Moreover, as an investor, I have to make major choices about which index to invest in. Do I do small caps? Do I do the total stock market? These are serious judgment calls on various segments of the market -- not easy calls," Hwong adds.

I can agree with that. These days, investors have the luxury of choosing from many different index funds. But once you've done the hard part -- deciding what asset allocation is right for you -- the decisions get easier.

A Crystal Ball

Last week I took a shot at

predicting some of the stories that you will read at the end of the year. Some of my forecasts included: fund managers blaming their poor performance on Y2K issues and former

(WWWFX) - Get Report

Internet fund manager Ryan Jacob appearing in a

GQ

layout to help market his new fund.

Reader

Craig Ervin

adds this realistic prediction: "The

Dow

will take another big dip because individual investors will move more stocks to cash. With the Y2K coming soon, the aging Baby Boomers could try to protect gains of recent years by changing their portfolio. As we all know there's a ton of 401(k) money influencing the markets."

Maybe they'll be putting that money under their mattresses, also known as the

National Bank of Serta

.

Betting the Farm

Readers love to debate the virtues of index funds vs.

Standard & Poor's Depositary Receipts

(SPY) - Get Report

, also known as Spiders.

Satish Bhagat

wants to know: "If the cost of a Spider is the same as the

(VFINX) - Get Report

Vanguard 500 Index fund, why should I invest with Vanguard when I can buy a Spider on margin and double my buying power? Is this a good reason to select the Spider instead of the Vanguard 500 index?"

The expenses on these two products are, indeed, the same -- 0.18% a year. However, you'll pay a commission to buy and sell the Spiders, just as you would for stocks.

You could buy both these investments on margin. Some brokerages, such as

Charles Schwab

(SCH)

, will let you buy funds on margin. Others, such as Vanguard, won't.

Here's what I don't get: You can't assume that buying on margin is going to make you more money. It could also cause you to lose more money. Using margin means that you're borrowing money from a broker to purchase more securities. Using 50% margin, you could buy $200 worth of a stock with just $100 down. But if the stock you buy falls in value by 50%, you've lost $100, your entire cash investment. Without the margin, you'd have $50 left of your $100 cash investment.

Of course, margin could make you more money on the upside. But look at it this way: If your car went twice as fast, you could get from New York to Washington in two hours. If you lived that long.

Imagine what dinners at your house would've been like last year as the

S&P 500

fell more than 16% from July to October. If indigestion isn't a problem, go ahead and leverage up.

Send your questions and comments to

deardagen@thestreet.com, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.

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