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November 14, 2007

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Kris

The negatives about the T Rowe fund are the high expense ratio and lots of volatility (down over 20% one year). I prefer an index with lower expenses and a more stable return (lower standard deviation) given that this is already a narrow sector fund.

The Financial Philosopher

Kris:

I will not argue that the low expenses and typically lower volatility of index funds are valuable; however, I do not believe PRHSX's 0.87% net expense ratio is "high."

To extend on a point I made in the post, I decided to stay away from index funds and ETFs because they all tend to over-weight pharmaceuticals, which is a sub-sector of health care that I believe to carry undue risk in the short-term and does not leverage the baby-boom factor as well as bio-tech in the long-term. I did not elaborate on this but I am sure that the "price-weighted" and "cap-weighted" natures of various passive funds have skewed the fund holdings. At times, this can be unfavorable to an investor, especially in the "less efficient" areas of the market (outside of mega-cap stocks) and stocks with greater "non-market" risks such as the regulatory and political risks inherent with health care...

Also, I never pay attention to Standard Deviation because I do not invest in just one fund -- I'm building portfolios. Put simply, two "risky" assets with high volatility can make one "less risky" portfolio with "low volatility." Adding a "risky" asset to a portfolio, when done correctly, can actually reduce the overall risk of the portfolio. The key is proper diversification...

I will post on standard deviation some time in the future. It is an often mis-understood statistical value and should not be considered the equivelant to "risk," especially when more than one asset is used in a portfolio.

Thanks for adding to the discussion and for provoking thought... Please comment again!

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