Could someone help explain these Mutual Fund expenses?

[youbet]

Originally Posted by innova

The name of the game for me is getting the highest return (compound annual growth rate) for each unit of risk I engage in.. and there is no better way to do that (bar none) than a carefully selected portfolio of low-cost index funds.

Hmmmmmm....... by picking a portfolio of index funds and varying the composition of the fund over time instead of just going with VTI, aren't you doing the same thing as ArtG and FD? Trying to outguess the market and focus in specific areas? (Talking domestic only here.)

[FinanceDude]

Originally Posted by innova

The fundamental difference between your approach and mine is that I focus on asset allocation to determine my risk level whereas you rely on the ever-shifting whims of a fund manager (market timing).

It's obvious you didn't read my post completely....... In our taxable accounts, I have complete asset allocation............

In other words, you have no control over your AA where I have precise control.

And I have made the decision to let the fund managers to control the risk in our QUALIFIED accounts. If the manager chooses to go to cash in a bad market, my risk is lowered. If the managers have 0 cash in a good market, I have no problem with that. If you have a problem with that, well, that's your problem........

To have a meaningful comparison of stats such as beta, we need to do it across a whole portfolio - not at an individual fund level. The beta of your fund at 0.78 is a meaningless number because your fund holds 20% cash - of course it should have less beta. You can easily do that yourself by holding 80% eq and 20% cash, at MUCH lower cost. This is not rocket science.

Again, you did not read my post. I said the beta of my PORTFOLIO was .78, NOT an individual fund......... Also, currently my AF are NOT 20% in cash, but they were from 2001-2002 ..........

For what its worth, I don't consider your approach 'idiotic' - selling AF is your bread and butter and to some extend you need to 'eat your own cooking'. I just think that your method of moderating your risk exposure is not cost-efficient.

I don't need to sell any AF. I manage accounts using options, ETF's, and individual stocks and bonds. I have very little mutual fund business at all. I am positive I am taking more risk in my taxable accounts than you are, but that's my business, and where I am going to get alpha.

Much as you decided to buy an asset allocation of index funds, I decided to put my money in non-index funds. As long as my methodology meets my expectations, I have no plans to change it.

I guess I don't fit the bill of the "normal" FA stereotype as folks on here perceive. I'm NOT the guy promising to "beat the index", and never have. Yet, my business continues to grow........

[FinanceDude]

Originally Posted by youbet

Hmmmmmm....... by picking a portfolio of index funds and varying the composition of the fund over time instead of just going with VTI, aren't you doing the same thing as ArtG and FD? Trying to outguess the market and focus in specific areas? (Talking domestic only here.)

Don't ask questions like that, we all know Innova is smarter than any of us on here...........

[Art G]

Originally Posted by innova

This is a pointless argument. Art and others simply haven't reviewed the data that points overwhelmingly to the advantage of indexes. You cannot have this conversation with them - I've tried several times.



What you continually FAIL to understand is that performance does NOT persist. You cannot look at a 1,5,10 year record and be assured that it is a good fund. The history book is littered with fallen superstars (latest being Bill Miller). So in many ways, you are indeed looking for that proverbial needle in a haystack, and the odds are dramatically stacked against you.



You have it precisely backwards. Most funds have underperformed the index, not the other way around (index outperforms most funds). Subtle but important distinction.



Of everything you say, this is the one statement that gets me upset. I don't have to be open minded - I was at one point and through reason and logic have determined that active investing is a losers game. When you call us out in that manner, it leads (a whole group of) uninformed investors to think that they can 'beat the market' and that leads them to make poor decisions such as:
-market timing
-manager selection
-choosing funds based on past returns
-choosing funds based on m* rankings

How many more academic studies need there be to show you that you have much better odds betting on the outcome of a coin flipping game than picking an active fund to 'beat the market'?

To continue to promote such wrongheaded ideas in the face of massive evidence to the contrary just amazes me.

WOW! I don't know where to start here. How about with these two sentences....

If you're going to state your reason for buying the index, that the index has outperformed most funds over time,

and this...
You have it precisely backwards. Most funds have underperformed the index, not the other way around (index outperforms most funds). Subtle but important distinction.

Uhhhh, isn't that exactly what I said? I say the index is overperformed and you say the funds have underperformed. It must be subtle because I don't get it.

Anyway, you talk about finding that needle in a haystack and how difficult it is, but that doesn't mean the needle isn't there, does it?
So, if the needle is indeed American Funds, then can't you still be stuck by it? If I were to hand you that needle and tell you to be careful it's sharp, are you going to stick it into your hand saying, "bahhhh, you couldn't possibly have found this".
I'm curious, but how many years of negative returns from the S&P would it take before you'd say, "hmmmmm, maybe I should be invested elsewhere"?
It seems so odd, but a bad year in an index fund doesn't bother you at all because it's an index? However, a bad year from a different fund drives you mad. If a 1,3,5,10,20, inception of the fund returns doesn't get your attention, then it seems to be clear cut proof that you don't want success. It's crazy to me. You have just stated conclusively that you would rather pay less for mediocrity than pay a bit more for more money in your pocket.

[innova]

by picking a portfolio of index funds and varying the composition of the fund over time instead of just going with VTI, aren't you doing the same thing as ArtG and FD? Trying to outguess the market and focus in specific areas? (Talking domestic only here.)

No. Choosing what asset classes to invest in is not the same as choosing a fund based on past performance.

If one were to strictly follow capital markets asset allocation, your equities would be 55% foreign and 45% US. There are many valid reasons for tilting away from that, not the least of which involves the fact that I'll be spending USD and not foreign currency. Thus, I choose a 60 US / 40 Foreign allocation.

There are similar reasons for tilting to small, value, and REIT that do not involve market timing, manager selection, or morningstar ratings.

My point there is that once I decide I want 60/40, using index funds ensures I get exactly that. If I buy an active US fund for my 60% slice, I may find that the manager in his infinite wisdom decides to invest 20% in foreign equities and 10% in cash and still call his fund 'US large company fund'. At that point I've lost control of my asset allocation, and as we should all be aware, over 90% of portfolio returns is driven by the choice of asset allocation.

[Bestwifeever]

Art, just curious, why do you care so much about whether we like index funds or managed funds? Good for you being so successful in choosing whatever you have your money, in all seriousness. And good for me and others who are comfortable in what we have our money in.

[Art G]

Originally Posted by innova

The fundamental difference between your approach and mine is that I focus on asset allocation to determine my risk level whereas you rely on the ever-shifting whims of a fund manager (market timing).

In other words, you have no control over your AA where I have precise control.

To have a meaningful comparison of stats such as beta, we need to do it across a whole portfolio - not at an individual fund level. The beta of your fund at 0.78 is a meaningless number because your fund holds 20% cash - of course it should have less beta. You can easily do that yourself by holding 80% eq and 20% cash, at MUCH lower cost. This is not rocket science.

The name of the game for me is getting the highest return (compound annual growth rate) for each unit of risk I engage in.. and there is no better way to do that (bar none) than a carefully selected portfolio of low-cost index funds.

For what its worth, I don't consider your approach 'idiotic' - selling AF is your bread and butter and to some extend you need to 'eat your own cooking'. I just think that your method of moderating your risk exposure is not cost-efficient.

WOW again!
First off, you have precise control?? Really did they ask you about adding AVB or GOOG to the S&P 500? Did you give them the OK to remove MOT? What control do you have over any mutual fund? At least with a managed fund you get to pick the manager.
And you say getting the highest returns is the name of the game, but when we show you that your method DIDN'T get the highest returns, you just give a big ol' HRRMMMPPHHH?
It seems the name of your game is spend the least money possible and the heck with returns.

[cute fuzzy bunny]

Originally Posted by FinanceDude

I guess I don't fit the bill of the "normal" FA stereotype as folks on here perceive.

Nope, I see very little tar and only a few feathers

I think this is another one of those discussions that will never be dominated by data and minds wont ever be changed. Where I think concern is generated is where the participants feel there is a large body of uneducated lurkers reading the thread who may be swayed to the dark side. And both sets of participants think the other side is the dark side.

You either think you can beat the system or you dont. A large portion of that decision rests on your level of predictive belief in a handful of economic and psychological trends.

Some people seem to think they can be successful with this or just feel better with someones hand on the wheel and making direct decisions. Some people seem to think they can be successful by making few changes and decisions and just letting things take their course.

The data seems to suggest that the latter course, over time, risk and expense adjusted, has a more likely chance of success on average than the former.

But there are those outliers, and there are the out and out liars. Those bug the heck out of people who just feel like theres some way to out-do the herd and they really want to be on that horse. Plus that passive investing is so dang boring.

Carry on...

[Art G]

Originally Posted by Bestwifeever

Art, just curious, why do you care so much about whether we like index funds or managed funds? Good for you being so successful in choosing whatever you have your money, in all seriousness. And good for me and others who are comfortable in what we have our money in.

Well, as I explained earlier, it bothers me when someone posts something as fact, and others blindly accept it as value. Couldn't I ask the same question as to why those arguing with me care that I like American funds? It takes two different sides to have a debate. Just because you disagree with my side, doesn't mean I'm arguing any differently.
I read on another thread that one poster is going to wait until another poster gives them the signal that they should dump their stock. What I find interesting is that this same person will proudly exclaim that they have no need for professional assistance, and yet they're using free advice offered by someone they've never met?
I've read a lot of useful information on this site and believe me I appreciate all opinions, even if I don't agree with them, but some of the logic used on here just befuddles me at times, and arguing factual evidence in the face is one of those times. JMO

[innova]

I'm curious, but how many years of negative returns from the S&P would it take before you'd say, "hmmmmm, maybe I should be invested elsewhere"?
It seems so odd, but a bad year in an index fund doesn't bother you at all because it's an index? However, a bad year from a different fund drives you mad. If a 1,3,5,10,20, inception of the fund returns doesn't get your attention, then it seems to be clear cut proof that you don't want success. It's crazy to me. You have just stated conclusively that you would rather pay less for mediocrity than pay a bit more for more money in your pocket.

You are clearly suffering from the 'Protestant work ethic'. You believe that by working harder, you can pick managers / stocks/ funds / whatever that will outperform a simple index.

Let me pose a question. How many large-cap funds will deliver good returns when the S&P is negative? Do you not understand the the s&p is a proxy for the US large market as a whole? In any given year, we expect that 50-60% of funds will beat the S&P. That goes down over time in a fashion quite similar to how the outcome of a coin-flipping contest would go. Performance does not persist. The odds of the S&P500 being negative several years running while active funds invested in the SAME category of stocks offering nice returns is essentially nil.

The other comparison we need to make is your fund should not be compared to the S&P 500 (which I don't even hold, BTW), but rather a proper basket of US stocks including large cap, small cap, reit, etc. Need to consider the portfolio as a whole.

You cannot buy better returns, and you cannot identify winners in advance. Again - some reading of the academic research would almost certainly give you better long-term investing results.

[Bestwifeever]

Originally Posted by Art G

Well, as I explained earlier, it bothers me when someone posts something as fact, and others blindly accept it as value. Couldn't I ask the same question as to why those arguing with me care that I like American funds? It takes two different sides to have a debate. Just because you disagree with my side, doesn't mean I'm arguing any differently.
I read on another thread that one poster is going to wait until another poster gives them the signal that they should dump their stock. What I find interesting is that this same person will proudly exclaim that they have no need for professional assistance, and yet they're using free advice offered by someone they've never met?
I've read a lot of useful information on this site and believe me I appreciate all opinions, even if I don't agree with them, but some of the logic used on here just befuddles me at times, and arguing factual evidence in the face is one of those times. JMO

Fair enough. As someone who doesn't know her beta from a hole in the ground (yet still more financially savvy no doubt than 90 percent of my peers), this argument is just fascinating to me.

But I think the person who said they would dump their stock when someone else gave them the signal was probably kidding -- and interestingly enough that stock probably wasn't in an index fund?

[Art G]

Originally Posted by innova

You are clearly suffering from the 'Protestant work ethic'. You believe that by working harder, you can pick managers / stocks/ funds / whatever that will outperform a simple index.

Let me pose a question. How many large-cap funds will deliver good returns when the S&P is negative? Do you not understand the the s&p is a proxy for the US large market as a whole? In any given year, we expect that 50-60% of funds will beat the S&P. That goes down over time in a fashion quite similar to how the outcome of a coin-flipping contest would go. Performance does not persist. The odds of the S&P500 being negative several years running while active funds invested in the SAME category of stocks offering nice returns is essentially nil.

The other comparison we need to make is your fund should not be compared to the S&P 500 (which I don't even hold, BTW), but rather a proper basket of US stocks including large cap, small cap, reit, etc. Need to consider the portfolio as a whole.

You cannot buy better returns, and you cannot identify winners in advance. Again - some reading of the academic research would almost certainly give you better long-term investing results.

Well I wrote out a long answer, but what the heck. It doesn't matter how many times or how many ways I point out we're discussing apples and oranges. Nevermind.

[innova]

First off, you have precise control?? Really did they ask you about adding AVB or GOOG to the S&P 500? Did you give them the OK to remove MOT? What control do you have over any mutual fund? At least with a managed fund you get to pick the manager.

LOL. When I make a decision to have part of my portfolio invested in large-cap US stocks, the index will precisely stick to my objective. If GOOG meets criteria for large-cap US stock, its added. Remember - returns are driven largely (>90%) by choice of ASSET ALLOCATION, not individual security picking. Reason I index is because that is the most reliable way over the long-term to achieve the highest returns.

But there are those outliers, and there are the out and out liars. Those bug the heck out of people who just feel like theres some way to out-do the herd and they really want to be on that horse. Plus that passive investing is so dang boring.

Good point. It used to bug the heck out of me that no matter how sophisticated the analysis some REALLY smart people do, there is no way to earn excess returns. It seems that if you work hard you should get the outcome you seek, but financial markets simply do not work that way. I know that to some here, it looks like I've thrown in the towel with regard to seeking higher returns... but the data has come down strongly on the side of passive investing and no matter what I think or feel that won't change that.

Gambling and speculation are exciting. Investing shouldn't be.

BTW Art - don't take it personally - this has nothing to do with us as people, its strictly about investing philosophy and the pursuit of debate. If this thread has served the purpose of getting people to think more about why they are invested in the funds they've chosen then we both had an impact.

Other thing is - no matter who is right/wrong, we're probably not talking about huge orders of magnitude as to where we'll end up (many roads to Dublin).

[Art G]

innova.....Check out INTC and MSFT on 11/1/99, the day they were both added to the DOW 30. What have these stocks done since being added.
Using the criteria that, I guess they deserve to be added so I should own them in my portfolio seems like a really whacky reason to own stocks. JMO

[innova]

It is unfortunate, no doubt about it. There is a fair amount of research in the index circles right now about whether or not cap-weighting is the best method of indexing - some are arguing for equal-weighting instead, but thats really a whole other topic. There were certainly a lot of tech companies entering the S&P that year whose market caps would later prove to be substantially less.

How many people in 99 could predict the return to an investor those stocks offered from 99-08 though? To be fair, there were probably a fair number of active funds buying them up at the time as well. It was the 'new economy' after all - nobody wanted to miss out.

[FinanceDude]

I think cap-weighting is stupid, it in effect cancels out the index's main reason for being, well, and INDEX.

If MSFT has a "bad day", then the Dow drops 100 points? That's stupid...........

[youbet]

Originally Posted by innova

My point there is that once I decide I want 60/40, using index funds ensures I get exactly that. If I buy an active US fund for my 60% slice, I may find that the manager in his infinite wisdom decides to invest 20% in foreign equities and 10% in cash and still call his fund 'US large company fund'. At that point I've lost control of my asset allocation, and as we should all be aware, over 90% of portfolio returns is driven by the choice of asset allocation.

There are several managed funds which follow a strict 60/40 (total dom stk mkt/total dom bond mkt). My 401k is in one. It seems like there is - and it's not a surpirse - a grey area as to what a managed fund is. I consider Vngd's balanced funds to be managed. They're certainly constrained by strict AA allocation guidelines, but managed just the same. You seem to be referring to managed funds as those where the manager has wide discretion and/or has a sector/region specific focus.

I guess I describe my outlook as this....... If an actively managed fund has a prospectus-defined goal which is congruent with something I want to do - say invest in Chinese commodities, and I'm struggling to do that on my own and am willing to pay some manager a fee to do so for me, well that's what I'll do. However, I have seldom participated in a so-called actively managed fund where the manager's constraints were extremely loose, such as "go invest my money for me."

BTW, since we all love to give anecdotal examples, I bought a actively managed load fund with a large cap growth focus about 35 years ago which beat the S and P 500 for a long time and made me very happy! About a decade ago, results detiorated. Finally, the company tossed in the cards and combined the fund with another, more or less washing away evidence of their stumble. So I did get a couple of decades of superior performance out of a managed load fund...... followed by a big stumble. I'm sure glad I didn't recommend that fund to anyone while it was doing well.......

Edited to add: While I see some usefulness in actively managed funds (with easily understood objectives and constraints and relatively low ER's), I see NO USE for LOAD funds. The fund manager and his team may serve a useful purpose, the salesman no......