by Archie M. Richards, Jr., CFP^®
February 10, 2003

Phil writes, "Within my variable annuity policy, I can choose from among many mutual funds. How do I find an independent company like Morningstar that evaluates these funds? As subaccounts of an annuity, the funds aren't even listed in newspapers. The insurance company sends me quarterly reports. But otherwise, how can I track the funds?"

Most of the funds are probably managed actively, Phil. This means the managers try to beat a benchmark index, such as the S&P 500, by selecting stocks that perform especially well.

As a general rule, the effort fails. Benchmark indexes are hypothetical portfolios with no costs. Actively-managed funds are real portfolios with high costs, due to the stock research and the frequent buying and selling. Most of the time, the high costs cut the net results to below those of the benchmark the fund is trying to beat.

It's a waste of time to try to choose actively-managed funds. Hardly any of them have consistently superior results. Besides, a fund's performance in the past has little bearing on its performance in the future. Studies have shown that funds rated highly by Morningstar generally perform about the same as those that are rated poorly.

I prefer index funds or exchange-traded funds (ETFs). These follow indexes, too. But instead of trying to outdo the indexes, they just try to match them. No stock research is needed. The managers of index funds and ETFs buy and hold the stocks that are included in the index being tracked.

Transaction costs are cut, too. The stocks included in indexes are seldom changed. Therefore, index funds and exchange-traded funds buy and sell their holdings infrequently. Net of all costs, they generally outperform actively-managed mutual funds.

If index funds are offered within your annuity policy, use them. Disregard historic performances. Just diversify among different classes of investments: big stocks, small stocks, stocks priced high in relation to earnings, stocks priced low in relation to earnings, foreign stocks of various regions, real estate investment trusts, and long-term bonds. You'll find index funds and exchange-traded funds for each of these categories (although perhaps not within your variable annuity policy).

Other than spreading your money among various categories, don't feel you have to work hard at your investments. Just pick the categories and, every 13 months or so, rebalance back to the original percentages you chose.

Otherwise, let your investments alone. Millions of workers are employed by the companies whose stocks are acquired by index funds and ETFs. All over the world, people are creating wealth. Let them create it for you.

Want to reduce your property taxes?

Just tear down part of your house. That's what David Bishop, of Mystic, Connecticut planned to do.

David is unmarried and retired. He became the foster father of a young boy and later adopted him. The boy is now 13.

David loves the view of the Mystic River from his home. He added an in-law apartment for his parents. After both parents died, David counted on renting out the apartment to help pay for the sky-high property taxes.

Nope, the town's zoning laws required that the "in-law" apartment be used only by in-laws or parents. The town suggested that David and his son utilize the entire house. But the two of them don't need 3,800 square feet.

As a final recourse, David planned to make the house less valuable by tearing down two-thirds of it. Starting with the roof, he would have reduced the number of rooms from 15 to 5.

Alas, David learned that most of the value of his property is in the river-front land, not the house. That was the final straw. David must sell the property. He hates moving his son to a different school district, and he'll miss the tranquil view.

Does your town use zoning laws to hamper your life? Is your house too big, the property taxes too high, but the view inspiring? Do as David Bishop intended. Cut the home's value by jettisoning some of its rooms.