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A passive indexer or an alpha seeker?
Old 12-26-2010, 05:41 PM   #1
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A passive indexer or an alpha seeker?

I'm an indexer and take a passive approach to investing rebalancing when my AA gets off by 10%. I might tweak that AA as I get older and become more conservative approaching ER and I have made the decision to pay down my mortgage with recent stock gains rather than letting it ride, but I'm not out there hunting alpha.

I have a friend who is an alpha hunter which makes for animated conversations over a few beers. He does research and jumps into things that folks like Bill Gross recommends. Recently he's big on high dividend paying closed end funds like Reaves Utility (UTG) and Pimco Corporate Opportunity (PTY). I argue that although they've given great total returns over the last 2 years, the alpha isn't necessarily higher than mine as he's taken on more risk.

He's still in the accumulation phase and I'm looking at ER in a couple of years so we have different philosophies. He worships alpha, I see it as a false idol. What do you think?
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Old 12-26-2010, 05:49 PM   #2
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I'm primarily a passive indexer with very infrequent outbursts of alpha when I buy very small amounts of individual stocks, just for the heck of it.

95% of my retirement portfolio is in mutual funds.
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Old 12-26-2010, 05:51 PM   #3
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Nothing to think about until you report audited returns of your alpha-seeker. The alpha-seeker should have better than 20% to 35% YTD performance because that's where the indexes sit.
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Old 12-26-2010, 06:46 PM   #4
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He's still in the accumulation phase and I'm looking at ER in a couple of years so we have different philosophies. He worships alpha, I see it as a false idol. What do you think?
Can you run your respective portfolios through some sort of analyzer and compare the performance/risk differences?
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Old 12-26-2010, 07:07 PM   #5
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I never heard of alpha (but did look it up)... Lately I'm doing dividend stocks. I have about a 8.5% yield from the dividends (and mostly in iras so not taxed yet) and about a 25% unrealized capital gain in same. That's in about 2 years. Not complaining.

I sort of try to balance the industries I invest in. Not much into mutual funds any more having been burned badly from some.

I'm not exactly typical in this group...
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Old 12-26-2010, 07:37 PM   #6
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Nothing to think about until you report audited returns of your alpha-seeker. The alpha-seeker should have better than 20% to 35% YTD performance because that's where the indexes sit.
the S&P 500 is 15% YTD

most investors using index funds have assets allocated among bonds, stocks, and money market

it would be unusual for someone using a low fee passive investment strategy to be all in the Russell 2000 or similar index that is outperforming the market as whole

as to OP's discussion, investors do not have to be limited to one strategy or another, you have your core positions in index funds and also have a portion of your portfolio in individual stocks that are high alpha or beta or whatever else (it is not impossible to outperform the market)
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Old 12-26-2010, 07:51 PM   #7
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Most alpha-seekers have assets allocated among bonds, stocks, and money market. They tend to only tell you about their winners. The S&P500 ain't "the market" anymore unless you want to show how easily it can be beat.
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Old 12-26-2010, 08:10 PM   #8
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Most alpha-seekers have assets allocated among bonds, stocks, and money market. They tend to only tell you about their winners. The S&P500 ain't "the market" anymore unless you want to show how easily it can be beat.
I am just not seeing what passive AA model would produce 25-30% YTD

the majority of people in the investment universe would be lucky to have 15% YTD

if an investor was only 50% equities for the majority of the time during 2010 and they had a YTD return exceeding 15% --- then some might label them a successful finder of alpha during the year

it might just be luck too --- but whatever you call it --- they matched the broader equities markets with only half the chips in the game
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Old 12-26-2010, 08:27 PM   #9
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Check out the "index" returns at Index Funds - DFA Advisors - DFA Funds - Dimensional Fund Advisors Approved even the Vanguard Total Stock Market Index fund is up more than 15% YTD. Even a portfolio of 30% bonds is up about 15% YTD.

Pick your bond allocation, then find a portfolio at IFA with the same percentage in bonds. You should be beating that portfolio each and every year or you ain't got no alpha. Instead you just got index.
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Old 12-26-2010, 08:38 PM   #10
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Check out the "index" returns at Index Funds - DFA Advisors - DFA Funds - Dimensional Fund Advisors Approved even the Vanguard Total Stock Market Index fund is up more than 15% YTD. Even a portfolio of 30% bonds is up about 15% YTD.

Pick your bond allocation, then find a portfolio at IFA with the same percentage in bonds. You should be beating that portfolio each and every year or you ain't got no alpha. Instead you just got index.

your link landed me at web site selling fee based financial advisory services

I am bit confused why a sales site would have anything to do with the definition of alpha

now I am confused
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Old 12-26-2010, 08:46 PM   #11
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LOL! your LINK is to a fee based advisory service

doesn't that defeat the purpose of boglehead-type investing?
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Old 12-26-2010, 08:48 PM   #12
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You can reverse-engineer everything at IFA in a do-it-yourself portfolio. I am not recommending them as a place to put your money. I am recommending them as a place to use as a benchmark that you should outperform since you will not have to pay their fees.
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Old 12-26-2010, 08:55 PM   #13
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I will look at their analysis further ... thanks

I consider myself lucky because I had limited market exposure during the financial crash through active investing (market-timing) ... I also increased my exposure during 2009

the extra funds that got preserved and added to my portfolio over the last few years would take decades to make up for compared against a passive portfolio

I am open to going index/passive as I just want the best results

my personal results through luck or whatever vastly outperformed passive investing --- I realize I may not be so lucky in the future

but I am happy to bank the gains --- I also have no need to win an argument --- I just want results
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Old 12-26-2010, 09:05 PM   #14
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the extra funds that got preserved and added to my portfolio over the last few years would take decades to make up for compared against a passive portfolio
That's very interesting. We have threads here where many people claim to be ahead of where they were 3 years ago. So if you are decades ahead, you should just keep doing what you are doing.

BTW, I don't mind market timing when it works, but I am skeptical of anecdotal claims.
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Old 12-26-2010, 09:16 PM   #15
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That's very interesting. We have threads here where many people claim to be ahead of where they were 3 years ago. So if you are decades ahead, you should just keep doing what you are doing.

BTW, I don't mind market timing when it works, but I am skeptical of anecdotal claims.
ok, I am stretching a bit

but I if I extrapolate my market-timed gains into future gains just like any passive investment analysis would do with gains from lower fees ... I can throw out decades into the conversation

again, I have no problem going fully passive --- and I may do that to spend more time on other things
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Old 12-26-2010, 09:18 PM   #16
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Remember: buy-and-hold is dead or never was; it's buy-and-rebalance.
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Old 12-26-2010, 09:22 PM   #17
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Remember: buy-and-hold is dead or never was; it's buy-and-rebalance.
thanks

my retirement plan has self-directed options along with index fund options that includes automatic rebalancing quarterly

if I go passive in 2011, at least I have the tools to do it
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Old 12-26-2010, 09:40 PM   #18
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I'm definitely a passive/indexer and a rebalancer.
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Old 12-27-2010, 08:36 AM   #19
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I think the real question for you to ask your alpha hunter friend is what his aggregate return has been for the last 5 years (2006-2010, inclusive) and compare it to the return of an index portfolio of 60/40 equities/fixed income. If he beats it, congratulate him - he has done well. My guess is that the index portfolio outperforms the alpha hunter portfolio over some reasonable investment time horizon (and it is a lot less effort).
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Old 12-27-2010, 09:57 AM   #20
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I seek alpha, but it looks like all I have found is beta.

So, it forces me to do some market timing. It seems to work so far. It takes a bit of work, but I still enjoy it. When I don't want to do it any more, Wellesley would be as good as anything else to trust my money with.
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