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Old 06-06-2014, 09:41 AM   #41
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Historically, active management can succeed in beating indexing in bull markets. ...
'Can', or 'does' (on average)? I don't recall seeing data on this, I'm guessing you'd still need some luck in picking the active funds that will outperform in a bull (before they outperform, not in hindsight).


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The problem is that when it underperforms (either in a bear or a stagnant market) it REALLY underperforms,
So in addition, you'd have to predict the bull/bear cycles to avoid wiping out your 'excess' gains! That alone could really help an investor, index or not.

This sounds like a rear-view mirror analysis, not something we can take advantage of going forward?

-ERD50
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Old 06-06-2014, 10:01 AM   #42
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Interesting idea, and certainly possible (I guess, but maybe not, due to the size of the market?).

But no doubt we will hear about it if it happens. The bogleheads and other indexers will have plenty of salespeople and 'internet experts' (and maybe a few FOREX traders) loudly pointing out how the indexers are finally wrong, after all these years (we told you!).

If/when that happens, I may be too old to be aware enough to make changes. But maybe the disadvantage would be slight, and not a big deal at that point?

-ERD50
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The market is a feedback system, so if pricing ever becomes even slightly out of whack because too much money is in indexes, investors will move to take advantage of the anomaly and quickly eliminate it. Given the lengths traders will go to for the *tiniest* gain (or perceived possible gain), I don't think indexing's dominance will ever end.



The fidelity results need to be properly normalized against some kind of factor model. Otherwise there's just too much slop in what is a "comparable" fund.
Like many others here I have been in index funds a long time, and often wondered 'what if everybody did it'? Let's take it to the extreme. At that point (at the of course theoretical extreme), who would price the stocks? People just buy and hold a piece of everything until they need the cash for expenses and then sell. There is no trading, no way to price equities, and no efficiency. Then what would happen?

Well then someone (assuming not everyone is an automaton) would see that one company is actually worth much more than its market price, and buy that company. Now they could go back on the market and sell the stock again if they want (of course it goes into the index) or just keep pocketing the dividends. I think eventually you get to the point that indexing cannot fail, because you cannot invent a system whereby enough people index to make it fail. You would have to eliminate all logic, greed, and hubris to make that happen.

I do believe that there is enough logic, greed and hubris to keep the market functioning relatively efficiently for a very long time, at least longer than my time frame.
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Old 06-06-2014, 10:24 AM   #43
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Originally Posted by ERD50 View Post
'Can', or 'does' (on average)? I don't recall seeing data on this, I'm guessing you'd still need some luck in picking the active funds that will outperform in a bull (before they outperform, not in hindsight).


So in addition, you'd have to predict the bull/bear cycles to avoid wiping out your 'excess' gains! That alone could really help an investor, index or not.

This sounds like a rear-view mirror analysis, not something we can take advantage of going forward?

-ERD50
The reverse could be true too.

if enough managed funds are able to find where values lie if indexing becomes overvalued then you would be taking the long shot that indexing wouldn't beat your managed fund statistically.

lets look at last year as an example not that one year means anything.

statistically with 21 out of 26 large cap funds beating the index the odds are pretty good just picking one blindly that you will beat the s&p 500.

that makes indexing odds quite poor at beating those managed funds.

see how it goes both ways?
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Old 06-06-2014, 10:31 AM   #44
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historically what was, may change as indexing becomes more and more popular which was why I think it may be an end to its own performance.

in fact based on fidelity's recent results maybe it already has started shifting.

time will tell.
I don't see how this can happen. Selective pump and dump on a massive scale? By the very act of trading, they adjust the prices and are assimilated into the Borg.

I have consciously set my asset allocations to reflect global market capitalization. To the degree that I succeed, my goal is to average out the highs and lows of various sectors, so that if one index is out of favor, another will pick up the slack. If there are flaws in my strategy, I'd love to hear about them.
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Old 06-06-2014, 10:35 AM   #45
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The market is a feedback system, so if pricing ever becomes even slightly out of whack because too much money is in indexes, investors will move to take advantage of the anomaly and quickly eliminate it. Given the lengths traders will go to for the *tiniest* gain (or perceived possible gain), I don't think indexing's dominance will ever end.


The fidelity results need to be properly normalized against some kind of factor model. Otherwise there's just too much slop in what is a "comparable" fund.
The first paragraph speaks to the paradox of indexing: in order to be really successful, it almost requires that timers and traders continue to time and trade.

The second I agree with, essentially saying that three bull years is too short a period to declare any kind of trend. It's akin to declaring gold the best investment vehicle around just by looking at its performance around three years ago. I'm interested in what I can do to make a good return over 30 years, not 3... and in that regard, I understand the impact of a 1% expense ratio against a 0.1% ER... that is where indexing wins me over. It's like racing a triathlon without having to do the swim leg: a few might catch me, but most will not.
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Old 06-06-2014, 11:02 AM   #46
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that makes indexing odds quite poor at beating those managed funds.
... for that year that's already passed. The point ERD is making, and I agree, is that your chances of guessing which funds may or may not beat the benchmark each year get less and less as you try to do it year after year (or period after period). Last year, you had an 80% chance of picking a large cap managed fund that beat the index, but that percentage changes every year, certainly many years being significantly less.

So first, you have to pick the sector (large cap, small cap, int'l, etc.) that will out perform, THEN you have to pick a fund that will outperform. And then you have to repeat it.

When you start to factor the odds of getting that choice right all or most of the time, coupled with the head start you get due to exceptionally low expenses with indexing, I'll take indexing every time. Recall that part of the benefit of indexing is the "set it and forget it" ability with your portfolio. Certainly if you're desperately seeking index-beating returns, indexing isn't for you, but most indexers are satisfied with above average returns, low expenses, small tax obligations from dividends, and ease of use.

(Note: "average" is not defined by the index, IMO.)

Either way, one should be planning with a number (i.e. 6% pre-inflation return, or 3% real return, etc.) rather than saying "assuming S&P returns" or "assuming 1% over S&P returns." How you get there... well, that's up to the individual!
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Old 06-06-2014, 12:09 PM   #47
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The main reason I do not like index investing is that it keeps pumping money into stocks that have risen, while taking money from stocks that have declined. Yes, stock prices usually rise for good fundamental reasons, but buying indiscriminately often drive them to stratospheric levels, causing greater crashes later on.

Hot MFs that beat indexing usually chase hot stocks and overweigh these sectors compared to the index. On the other hand, conservative MF managers who also do not index look for contrarian plays. These conservative managers will trail the index in bull years, but will not give back all the gains in a crash like hotshot managers do. They are the true tortoise in my view.
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Old 06-06-2014, 02:52 PM   #48
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I have both active and indexed.

I also liked both Ginger and Mary Ann.
btw..Surveys say most guys like Mary Ann
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Old 06-06-2014, 02:58 PM   #49
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I do not know what turnover you have, but mine is actually very low. Wellesley looks like a day trader compared to me. I am kicking myself now for bailing out of some sectors too soon earlier this year, and left behind 50-60% gains. I am not as aggressive as I used to be, and that is a good thing, I think.
I actually have low turnover. It is mostly a question of directing new contributions.

Doing nothing has often proved to be the best course of action for me.
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Old 06-06-2014, 07:01 PM   #50
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I've grown a bit concerned that over the years W&W have grown to be 34% of my total liquid NW so I decided in my last rebalance in 2013 to do so into Vanguard Target Retirement Income which is composed of all index funds but a roughly similar AA to Wellesley instead. Oy vey - I don't know what pixie dust gets bestowed upon W&W but it doesn't extend to the index funds that make up the ending Target Retirement fund.
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Old 06-06-2014, 08:45 PM   #51
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The main reason I do not like index investing is that it keeps pumping money into stocks that have risen, while taking money from stocks that have declined. Yes, stock prices usually rise for good fundamental reasons, but buying indiscriminately often drive them to stratospheric levels, causing greater crashes later on.
...
I am mostly indexed and have thought about what you mentioned but came to the conclusion that it was of relatively light importance. Certainly index funds have to be invested in stocks of companies with a large enough market cap, and so will periodically have to drop some that fall too low and add some new ones as they rise. The market is after all a dynamic array of companies that come and go with the changing times. However there is no predictability of future returns from a previous price change alone. So as long as the change is done on market cap alone, I don't see much of a problem. They must also keep the market sectors (leather goods and buggy whips vs. airplanes and semiconductors) in line with overall capitalization, which I assume they do reasonably. At any rate, you have to do pretty much the same thing over time with any fund. You might change the company makeup differently, and certainly don't have to worry about keeping a balance, but still must change as the market changes. I just don't see, or have seen presented, a problem with the way the index funds do this overall.
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Old 06-06-2014, 10:56 PM   #52
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I remember that in the year or two leading up to the market meltdown in 2008-2009, no less than Jack Bogle sounded the alarm that financial service and banking companies took up too large a percentage of the market equity for what they did, being basically middle men. I do not remember the exact percentage at that point but perhaps it was more than 20%.

If you put fresh money to the market at that point, a larger percentage of your money goes to buy those frothy financial companies. The same thing happened in 2000, but with tech stocks taking the center stage.

Of course worse than indexing at these moments were MFs who loaded up on the hot stocks, and boasted of beating the index. Only the contrarian investors are not guilty of feeding the frenzy.
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Old 06-07-2014, 03:32 AM   #53
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tech went for 18% of the s&p 500 to a whopping 1/3 of of it right when the bubble burst. the whole weighting thing for the s&p 500 is just silly. putting more of your money in the over valued stuff vs the under valued stuff goes opposite wisdom.

in fact had you bought the fourtune 500 instead of the s&p 500 which uses different criteria you would have beaten the s&p 500 by 1-2% average every year.
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Old 06-07-2014, 11:15 AM   #54
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I remember that in the year or two leading up to the market meltdown in 2008-2009, no less than Jack Bogle sounded the alarm that financial service and banking companies took up too large a percentage of the market equity for what they did, being basically middle men. I do not remember the exact percentage at that point but perhaps it was more than 20%.

If you put fresh money to the market at that point, a larger percentage of your money goes to buy those frothy financial companies. The same thing happened in 2000, but with tech stocks taking the center stage.

Of course worse than indexing at these moments were MFs who loaded up on the hot stocks, and boasted of beating the index. Only the contrarian investors are not guilty of feeding the frenzy.
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tech went for 18% of the s&p 500 to a whopping 1/3 of of it right when the bubble burst. the whole weighting thing for the s&p 500 is just silly. putting more of your money in the over valued stuff vs the under valued stuff goes opposite wisdom.

in fact had you bought the fourtune 500 instead of the s&p 500 which uses different criteria you would have beaten the s&p 500 by 1-2% average every year.
Very good points. So it begs the question, if one were to pick an index fund now, which one(s) to pick? Even Vanguard has 17 of them.
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Old 06-07-2014, 12:07 PM   #55
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As a slicer and dicer, I look at ETFs of different industry and business sectors and try to determine which are undervalued or overvalued. Note that some of the ETFS are along the line of market cap, e.g. large cap valued, midcap growth, etc...., which are not the same thing as the previously mentioned.

But going along the above lines usually requires the investor to be making subjective decisions, and that is against the true indexing philosophy.
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Old 06-07-2014, 12:40 PM   #56
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I don't think slice & dicing is incompatible with indexing philosophy. Even on bogleheads you see many that slice and dice with index funds targeting different sub-populations of stocks (and this is what I do). It is going against a total market approach -- maybe that is what you meant by "true indexing philosophy"?

I have a big proportion of my portfolio in index funds, but what I appreciate about them is the low costs, low turnover, and no attempt at stock selection (beyond the broad mandate of the fund - e.g. to get small cap stocks, etc.). However, these characteristics can also be found in other funds that use say quantitative screens but are not strictly an index.
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Old 06-07-2014, 12:47 PM   #57
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I thought that the original indexing philosophy (the orthodox one) is that one buys S&P 500 and calls it quit. OK, one is allowed to balance that with bonds, but no more than that.

There seems to be more branches of indexing that I do not know about.
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Old 06-07-2014, 05:22 PM   #58
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I think the main philosophy behind indexing is that individual stock picking is a fool's errand due to efficient markets.

This is divided into two camps: (1) folks who just get a S&P 500 or total market index and call it a done deal and (2) folks who think that there may be certain sub-populations or classes of stocks that have unique return/risk characteristics. And of course the best way to invest in these asset classes is to buy an index (I can't tell if biotech company A or B is going to be better so I'll just invest in both).

If you look at vanguard that are a lot of different indexes tracking small/large, value/growth and sectors like healthcare/REITs/precious metals. At least on bogleheads, I think the vast majority of posters have funds in indexes outside of the S&P 500 or total market.

I think there's quite a bit of debate as to what subsets of stocks actually have "unique" risk return characteristics. For example, FamaFrench followers might believe that the only other ways to diversify from the total market would be get value and/or small cap stocks. Thus such a person might invest in indexes for total market, small-cap value, and large-cap value. They wouldn't invest in an healthcare index because they think any additional return in healthcare would already be covered in their small and value indexes.
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