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Active versus Passive
Old 12-07-2014, 04:02 PM   #1
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Active versus Passive

Active vs passive investing: What you need to know - Dec. 7, 2014

I am surprised people still have 3 times as much money with active managers than they have in Index Funds/ETFs.

Are you into active or passive investing?
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Old 12-07-2014, 04:05 PM   #2
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100% passive. Have you not heard that SOME active managers can beat the indexes? But which ones...?
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Old 12-07-2014, 04:09 PM   #3
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Passive. Helps me sleep at night.
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Old 12-07-2014, 04:19 PM   #4
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Some how, index funds have been the stars lately. I try to use them when I can, given my 401k choices. However, it doesn't make sense to me that an active managed fund can't ditch the companies with poor prospects, over priced, or poor management, then pick those with a value bent and a good chance to beat the market. Buffet/Munger do it, are they not normal? Perhaps part of the reason is short term focus of investors, not willing to wait a quarter or two of poor performance while a fund manager picks up on the cheap.
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Old 12-07-2014, 04:28 PM   #5
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I use passive for the funds I have, but also have half my equities in stocks that I manage myself. I enjoy it.


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Old 12-07-2014, 04:36 PM   #6
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On the equity side, I have a passive core and active on the edges (value, emerging markets), plus some individual stocks. Bonds are active funds.
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Old 12-07-2014, 04:37 PM   #7
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I have passive etfs , and I am my own active manager, I also "hired" Buffet to manage some of my holdings via BRK

My plan is to evolve my holdings away from individual stocks into etf's.

As for Buffet/Munger, sure it seems at first they are the opposite, but in reality, they as active managers do better because of a few reasons. They get much better deals than are available on the open market because they can offer 5 billion dollar financing. They are also pretty passive, Berkshire still holds KO, Amex and others that were bought ages ago. Finally they buy entire companies, and influence the running of the company, so nasty surprises are less often for them.
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Old 12-07-2014, 04:40 PM   #8
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I also have some in a self managed account, but only about 10%. And it only stays at that level if I add to it each year. I'm not very good at picking them but I do enjoy it and don't loose except for lower returns than my funds.
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Old 12-07-2014, 04:52 PM   #9
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Pretty sure I'm passive aggressive.
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Old 12-07-2014, 05:00 PM   #10
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Passive in equities using ETFs, a mixture, though mostly passive, in Fixed Income using Mutual Funds.

Looking through the SPIVA scorecards at this link

Thought Leadership - SPIVA - S&P Dow Jones Indices

shows how difficult it is for an active manager to beat appropriate benchmarks over the long term.
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Old 12-07-2014, 06:09 PM   #11
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Old 12-07-2014, 06:10 PM   #12
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I am in the process of rolling into an IRA (retired 1 week ago). I had mostly managed funds and will continue with at least half managed funds through Vanguard. Will probably have a MidCap Index and SmallCap Index as well as an Int'l Index.
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Old 12-07-2014, 06:14 PM   #13
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I am passive in low cost ETFs in my IRA (roll-over). I guess you can say I "slice and dice" but may simplify in Jan. From 13 Index funds down to 5 or 6. I am 1 year retired.

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Old 12-07-2014, 06:25 PM   #14
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managed. all fidelity funds. performance has been good , been using them for 26 years following the same newsletter..

one of the flaws in the index /managed fund thing is the studies may show long term index's beat 80% of the funds but the fact is it does not beat 80% of the investors.


there are hundreds if not thousands of small funds out there with very little investor money and poor performance ..

in the mean time the long term better funds get the bulk of the investor money and they some years beat their index and some years don't . in fact the last 6 years you wiould be hard pressed to find many large cap fidelity funds that didn't beat the s&p 500.

this year was a strange year in the s&p 500 stoicks got all the attention and no amount of research and stock picking ability meant a thing.


just 2 fidelity funds growth company and contra have more than a trillion dollars in them. i would be bet those two funds have more investor money than the entire bottom 20-25% of funds.


you really do not need to know who the best funds will be , you just need to avoid the bad ones and your odds go up.


personally i don't care how my individual funds do. i care about the portfolio working as a team and how it does.

like nudging a big ship i adjust my portfolio to fit the big picture better .


for example when the dollar was weak fidelity multinational and export did well , but when it strengthened a switch to a better suited fund was made.

neither fund may have beat their index but working together they did .


there are so many small funds out there that do not have enough investor money to ever do well as it cost to much to keep the lights on and pay staff .
because of high liquidations they have to kep high cash positions too.

it is all these smaller funds with little investor money that tend to skew the results of the top performing funds with the bulk of investor money.
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Old 12-07-2014, 06:30 PM   #15
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Originally Posted by mathjak107 View Post
managed. all fidelity funds. performance has been good , been using them for 26 years following the same newsletter..
Do they match or beat the index funds? Or sometimes yes and sometimes no ?
Just curious
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Old 12-07-2014, 06:42 PM   #16
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managed. all fidelity funds. performance has been good , been using them for 26 years following the same newsletter..
Mathjak,

We are total opposites on every aspect of investing. I am all index funds and if I wanted managed fund it would certainly not be one of Fidelity Funds.

I might consider wellington and wellesley for example....

But that is all fine.... as long as you don't want to buy me a new keyboard
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Old 12-07-2014, 06:43 PM   #17
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many long term have beaten their indexes but like i say i am not interested in tracking individual funds. i am more concerned about the entire portfolio and whether it

meets my comfort range in volatility and income goals.

i have been following the fidelity insight newsletter since 1987. 100k without another penny added into the growth model is 2 million today after expenses..

thats is about 450k more than a s&p 500/ total market fund would have done . could i have done the same with index funds if they existed? don't know since many of the funds used have no equals.


http://www.reuters.com/article/2014/...0L23P520140128
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Old 12-07-2014, 06:46 PM   #18
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Some how, index funds have been the stars lately.


Nah, Index funds have been crushing it for decades. There are very few actively managed funds that can be their indexes over any meaningful period of time.


However, it doesn't make sense to me that an active managed fund can't ditch the companies with poor prospects, over priced, or poor management, then pick those with a value bent and a good chance to beat the market.


Well, that is the trick, isn't it? How do you define "Poor prospects" or "over priced"? Is SDRL going to get hammered in 2015 or is this the perfect buying opportunity? Is AMZN overpriced or is Apple a good buy? Some of it is obvious, like ditching companies that are declaring bankruptcy or have some majorly negative accounting issues or news coming about, but beyond that on the margins, it is hard to tell.


It is much more complicated than that. A variety of factors work against active management. Active managed funds have limitations on what they can invest in depending on how they define their strategy and such. If they say they are domestic, they can't invest in international funds, under any circumstances, no matter how attractive or good the investment.


Actively managed funds can't use margin, which can be helpful depending on market conditions. For example, now would be a fantastic time to borrow on margin as rates are well below 1%. For institutional, it is probably below .5%. There are also other strategies that aren't typically used by actively managed funds, such as covered call writing, but closed end funds DO use them.

Another thing are issues with stupid retail investors that typically surge into funds at the worst time (at the top) forcing fund managers to buy when they should be selling and bail at the worst times (at the bottom) forcing fund managers to sell when they should be buying. Also, fund managers can't be fully invested due to shareholder redemptions, so that is a drag on returns.

Funds also have limitations on what they can invest in, for instance, they typically cant invest more than a certain amount in a fund, AND they don't want to invest more than a certain % of the float on any given day for the sake of liquidity and overall ownership of the company.


For example, they may not be able to invest more than say 2% of the overall fund assets in any specific stock. For a 1B fund, that is 20M. They also don't want to invest more than 5% of the overall float, which may be 50% of say a 1B company or 5% of 500M, so they COULD invest 25M, but they can't due to fund policies. Now, just do that 49 more times. Is a 2% going to move the NAV of the fund substantially? Not really.


Then you consider as the fund grows and grows, these numbers still remain and it becomes more difficult to invest in anything that is going that isn't a huge traditional blue chip company. They can't invest a substantial amount of money into smaller companies that are going to deliver the higher returns, which are typically smaller companies due to their self-imposed restrictions.

In Peter Lynch's book one up on Wall St, he goes into detail about the difficulties in investing as a fund manager.


Buffet/Munger do it, are they not normal?


No, they aren't. They are multi-billionaires and they aren't fund managers. Soros has beaten the market for years, but he was a billionaire like 30+ years ago. He made a billion dollars in a single day in the 60's breaking the bank of England, but that was trading currency, which most mutual funds can't do. They have other investment options and things available to them, like borrowing at sub 1% levels or getting 10-1 margin levels.


Perhaps part of the reason is short term focus of investors, not willing to wait a quarter or two of poor performance while a fund manager picks up on the cheap.


Also true, or consider the wave of redemptions at PIMCO following Bill Gross's departure. Is there anything that has substantially changed about the product mix he was investing in? His strategy was sound the day before he left, but now the day after, sell everything?
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Old 12-07-2014, 06:53 PM   #19
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Mathjak,

We are total opposites on every aspect of investing. I am all index funds and if I wanted managed fund it would certainly not be one of Fidelity Funds.

I might consider wellington and wellesley for example....

But that is all fine.... as long as you don't want to buy me a new keyboard
i always liked wellesley but at this stage with a 40 year bull market in bonds winding down i much prefer a mix i can reduce bond holdings in if need be, or swap out balanced funds.

i think going forward in uncharted territory with high stock valuations and low rates together with soon to rise rates are going to produce far different results in static portfolios that do not adjust to fit the world around them as far as the big picture. .

i think the static portfolios that were basically buy and die and could sit with bonds with that 40 year long bull market in bonds may have it tough going by not adjusting more to the bigger picture.


but time will tell .
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Old 12-07-2014, 07:26 PM   #20
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For me, tax-efficiency plays a very big role, so I am all passive, except for that Vanguard GNMA fund which is actively managed.

Folks with active funds in taxable accounts may have higher tax costs.
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