Actively managed funds have + alphas in the worst of times

[wildcat]

As many of you have read, actively managed funds fail to beat the market over long periods of time.* However, some recent academic research suggests actively managed funds may protect you when you need it most - the worst of times - but revert back to failure over long periods of time.* Below is a link to the blog summarizing - "Do mutual funds perform when it matters most?" - the academic paper and it also has a link for the original paper by Robert Kosoki.

http://www.valuediscipline.blogspot.com/


BTW - WTF is up with some naked Asian dude in my mail box? Is that you again Cube Rat?

[REWahoo]

Originally Posted by wildcat

BTW - WTF is up with some naked Asian dude in my mail box? Is that you again Cube Rat?

Wildcat, you're such a special guy the forum voted to send your email address to the NAGP (National Association of Gay Porn).

http://early-retirement.org/forums/i...p?topic=9226.0

[wildcat]

[haha]

Originally Posted by wildcat

BTW - WTF is up with some naked Asian dude in my mail box?* Is that you again Cube Rat?*

No way. She has assured us that she deploys, ah, lighter armament.* Unfortunately, so do I.

Ha

[Dawg54]

Hey Cat, I'm gonna go ahead and concede this years KY/MSU football game to the cats. Bullies suck again.*

[dmpi]

Originally Posted by wildcat

However, some recent academic research suggests actively managed funds may protect you when you need it most - the worst of times - but revert back to failure over long periods of time.*

The problem here is you cannot figure out if you are in "the worst of times" except looking backwards. And then its too late to get it into a managed fund.

[AltaRed]

Which is why I still maintain a sizeable portion of my portfolio in actively managed value style funds, particularly in those areas I know least about. They minimize the dips in bad times and don't get caught up in 'irrational exuberance' in bubble times.

[Hydroman]

Originally Posted by wildcat

As many of you have read, actively managed funds fail to beat the market over long periods of time. However, some recent academic research suggests actively managed funds may protect you when you need it most - the worst of times -

This would suggest that actively managed funds maybe better for those who ER and have a reliance on their selected funds to generate a SWR. A return that is a bit less then market index maybe a reasonable trade for some protection against downward volatility. It is not going to do a retired person any good to be invested in a volatile index fund with a long term rate of return that beats 95% of the managed fund if your portfolio flames out due extreme dips in the bad years. The goal in retirement is maintaining an inflation adjusted SWR that supports your needs. That does not neccessarily mean beating the market or even matching the market.

[FinanceDude]

Originally Posted by Hydroman

This would suggest that actively managed funds maybe better for those who ER and have a reliance on their selected funds to generate a SWR. A return that is a* bit less then market index maybe a reasonable trade for some protection against downward volatility. It is not going to do a retired person any good to be invested in a volatile index fund with a long term rate of return that beats 95% of the managed fund if your portfolio flames out due extreme dips in the bad years. The goal in retirement is maintaining an inflation adjusted SWR that supports your needs. That does not neccessarily mean beating the market or even matching the market.

That is a valid and great point...................

[haha]

Originally Posted by Hydroman

This would suggest that actively managed funds maybe better for those who ER and have a reliance on their selected funds to generate a SWR. A return that is a *bit less then market index maybe a reasonable trade for some protection against downward volatility. It is not going to do a retired person any good to be invested in a volatile index fund with a long term rate of return that beats 95% of the managed fund if your portfolio flames out due extreme dips in the bad years. The goal in retirement is maintaining an inflation adjusted SWR that supports your needs. That does not neccessarily mean beating the market or even matching the market.

Volatility is definitely a killer, so what you say may well be true. But one problem with this approach is that while the fee may only be 1% of your investment, it could well be 50 to 80% of your income dividends. So you are thrown back on the need to liquidate the investments over time to receive cash flow.

I think the greatest security comes from avoiding this constraint. Maybe a value portfolio put together from 20 or so of the larger companies in Mergent's Dividend Achievers, for example?

Ha

[Hydroman]

Originally Posted by HaHa

Volatility is definitely a killer, so what you say may well be true. But one problem with this approach is that while the fee may only be 1% of your investment, it could well be 50 to 80% of your income dividends. So you are thrown back on the need to liquidate the investments over time to receive cash flow.

I think the greatest security comes from avoiding this constraint. Maybe a value portfolio put together from 20 or so of the larger companies in Mergent's Dividend Achievers, for example?

Ha

True, but in my case I am splitting my allocation between VG Wellesley (0.24% expense) and VG Star (.36% expense). Those expense ratios are not that much higher then index funds. Picking 20 Merchant Dividend Achievers for a value portfolio sounds great assuming you are confident in your stock picking skills and want to constantly monitor the market. You still will have to deal with capital losses and the tax implications of capital gains as you move from one stock to another as the portfolio evolves over time. I don't think it will be reasonable to pick 20 stocks and stick with those through a 30-40 year retirement. That also means spending a lot of your retirement time analyzing the market. Is that your plan Ha Ha? I am open to the concept.

[neo]

I'd question the basic premise that active management avoids market downturns to any extent. One thing that became obvious during the 2000 rout was that many (most?) fund managers had been herding into the same over-priced over-hyped stocks. Well if you want to be one of the lemmings herd you can do that via cheaper index funds. So maybe the premise should stipulate only managers who show some willingness to be contrarian.

[haha]

Originally Posted by Hydroman

True, but in my case I am splitting my allocation between VG Wellesley (0.24% expense) and VG Star (.36% expense). Those expense ratios are not that much higher then index funds. Picking 20 Merchant Dividend Achievers for a value portfolio sounds great assuming you are confident in your stock picking skills and want to constantly monitor the market. You still will have to deal with capital losses and the tax implications of capital gains as you move from one stock to another as the portfolio evolves over time. I don't think it will be reasonable to pick 20 stocks and stick with those through a 30-40 year retirement. That also means spending a lot of your retirement time analyzing the market. Is that your plan Ha Ha? I am open to the concept.

Those are pretty low I guess.

Yes, that is and has been my plan. Even giving up on average 30% can mount up, if your entire living has to be provided by your investments. Not that individual stocks don’t carry portfolio management expenses, but the expense can be less depending on portfolio size, management style, etc.

Ha

[Hydroman]

Originally Posted by timo

I'd question the basic premise that active management avoids market downturns to any extent. One thing that became obvious during the 2000 rout was that many (most?) fund managers had been herding into the same over-priced over-hyped stocks. Well if you want to be one of the lemmings herd you can do that via cheaper index funds. So maybe the premise should stipulate only managers who show some willingness to be contrarian.

Timo,
I do not interpret the article to mean using actively managed funds would avoid market downturns. I think the premise was the downside risk was lower then with indexs. It sounds like you dont like mutual funds whether active or index. What is your ER portfolio consist of?

[neo]

Originally Posted by Hydroman

Timo,
It sounds like you dont like mutual funds whether active or index. What is your ER portfolio consist of?

Yes I guess you could say that; to me the stock market essentially boils down to the Greater Fool theory, and I've lost interest in any kind of trading or actively following the market. Which is not to say I'm bearish, I just don't want to be too involved in the game. I'm currently less than 25% in stocks, which is based on a Monte Carlo simulation spreadsheet I developed and choose to believe in rather than the Firecalc analysis (which is based on past history and tells me I should have a lot higher allocation to stocks). My largest MF is Wellesley, then TRP Cap. Appreciation, Fairholme, Polaris Global Value, and a few smaller holdings in Vanguard and TRP funds.

[haha]

Originally Posted by timo

I'm currently less than 25% in stocks, which is based on a Monte Carlo simulation spreadsheet I developed and choose to believe in rather than the Firecalc analysis (which is based on past history and tells me I should have a lot higher allocation to stocks).

Using your method, what kind of SWR do you allow yourself?

Ha

[neo]

Originally Posted by HaHa

Using your method, what kind of SWR do you allow yourself?

Ha

I take [this years ending asset balance] / [last years ending asset balance], limit it to a value between 1.0 and 1.1, then multiply this times the previous years withdrawal. (Starting at a specified withdrawal for year 0.) Arrived at this algorithm by trial and error, so not suggesting it's better than any other method.

[donheff]

Originally Posted by timo

I take [this years ending asset balance] / [last years ending asset balance], limit it to a value between 1.0 and 1.1, then multiply this times the previous years withdrawal. (Starting at a specified withdrawal for year 0.) Arrived at this algorithm by trial and error, so not suggesting it's better than any other method.

If I understand that correctly, you would always increase your withdrawal after a good year (up to 10% over the previous year - the 1.1 upper limit) and would always stay the same as last year during a down year (the 1.0 lower limit) basically letting your spending fall back against inflation. Have you evaluated whether that is a survivable strategy under historic precedents?

[neo]

Originally Posted by donheff

If I understand that correctly, you would always increase your withdrawal after a good year (up to 10% over the previous year - the 1.1 upper limit) and would always stay the same as last year during a down year (the 1.0 lower limit) basically letting your spending fall back against inflation. Have you evaluated whether that is a survivable strategy under historic precedents?

Haven't run it against historical yearly data, though I do utilize some historical data as guidance. I use a Monte Carlo simulation over 40 years, where the stock market returns are normally distributed random values with a mean of 7% (i.e. average 7% yearly return over 40 years) and a standard deviation of 18% (that last is supposedly the historical s.d. for the overall market). By the way sorry for all the OT posts. (But you did ask.)

It runs for 100 trials and reports average/best/worst outcomes. So, using actual historical data would be like just running 1 trial, which at least for me would not inspire confidence. (Not that any prediction method really inspires confidence.)