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Re: Dave Ramsey said what??...
Old 10-25-2006, 04:44 PM   #61
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Re: Dave Ramsey said what??...

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Nevertheless, what I'm really interested in are anyone's thoughts on (and experiences with) the general approach of diversification not only among asset classes but also across a carefully selcted mix of index and active funds.
Sparky -

In my opinion this question or thought is mostly debatable on the issue of time horizon, risk and performance. I do believe active funds can reduce risk and in some cases outperform the market over short periods of time whereas the index funds continuously buy stocks regardless of current/future market conditions.

The difficulties and questions you have to really ask yourself is whether the added expenses (be sure to add turnover to that list) make the fund worth holding and whether or not you can select one of the funds - out of 8,000 - that will outperform.

Personally, my investment time horizon is very long, volatility is not an issue and I do not see the point of holding actively managed funds. The longer the horizon, the greater the chances are your actively managed funds will underperform. On top of that, add the fact that they have to handle huge inflows of dollars from investors. Not my cup of tea.....

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Re: Dave Ramsey said what??...
Old 10-26-2006, 05:34 PM   #62
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Re: Dave Ramsey said what??...

Thanks, all, for your opinions on the "active/index diversification" question. The potential for bloated funds to become closet index funds (albeit with higher expenses) seems worth keeping an eye on, and of course there have been some previous stellar examples of that problem. What I don't quite understand there is how the $1,000,000,000 stake (for %1 of the bloated fund, as saluki9 points out) compares with the total market capitalization and/or other relevant securities that would be available for purchase (and hence the number of potential buying oppotunities available for astute managers). It's clearly an enormous amount of money for me to comprehend, but if the market is large enough, then the approach of adding managers may indeed scale with the bloat. I guess we'll see on that count.
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Re: Dave Ramsey said what??...
Old 10-27-2006, 01:36 PM   #63
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Re: Dave Ramsey said what??...

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Originally Posted by sparkythewonderdog
Thanks, all, for your opinions on the "active/index diversification" question. The potential for bloated funds to become closet index funds (albeit with higher expenses) seems worth keeping an eye on, and of course there have been some previous stellar examples of that problem. What I don't quite understand there is how the $1,000,000,000 stake (for %1 of the bloated fund, as saluki9 points out) compares with the total market capitalization and/or other relevant securities that would be available for purchase (and hence the number of potential buying oppotunities available for astute managers). It's clearly an enormous amount of money for me to comprehend, but if the market is large enough, then the approach of adding managers may indeed scale with the bloat. I guess we'll see on that count.

Here is how it applies. If you're going to one of the very very few successful active managers you have to find stocks that the market has somehow (despite the thousands of analysts) undervalued. On top of that, besides finding it (before any of the other managers find it) you actually have to buy it for your fund. Now, if the stock is really that great, you would want to load up on it right? Otherwise, what is the point of buying a stock thats 10,15, or 20%+ undervalued if you aren't going to buy enough of it to make a difference in your fund? I mean, who cares if your hot pick doubles if its only 0.5% of your portfolio?

Well, when you have a $100,000,000,000 fund, you have several big problems

1. You need $1,000,000,000 of a stock just to make up 1% of your fund

2. To accumulate enough of that stock without the entire world knowing about it you have to be buying pretty big stocks with large float.

3. Almost by default you have limited yourself to the securities which have THE MOST analyst coverage, making them the least likely to be undervalued.

This is why you can tell that most active managers don't really believe in active management. If they did their portfolios would be

1. Smaller in total size

2. Hold far fewer positions than most do.

I forgot the exact number, but the average active fund holds something like 200 stocks. Do you really think the fund manager can make a good case for 200 stocks? Of course not, but most managers are far more worried about negative tracking error than they are with positive tracking error. The truth is that most of the really good active managers (there are some) don't outperform every year. They need patient investors which is why so many of them have gone to hedge funds where they can force their investors to be patient by limiting the timing of distributions.



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Re: Dave Ramsey said what??...
Old 10-27-2006, 02:25 PM   #64
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Re: Dave Ramsey said what??...

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The truth is that most of the really good active managers (there are some) don't outperform every year. They need patient investors which is why so many of them have gone to hedge funds where they can force their investors to be patient by limiting the timing of distributions.
Exactly. Or B) they close the fund and prevent additional money from coming in. I know of a few good boutique shops with solid, actively managed funds but most are now closed after the run up in the market and are now saddled with 20-30% cash (plus a concentrated portfolio of 40-50 ideas) which they intend to use when things look cheap again. Those are the types of actively managed funds that in my opinion could reduce volatility and enhance performance in shorter durations. Then there is always a small chance they may be able to stay ahead of the index funds over long durations. For the most part, very few active funds match that description and have that kind of control over their fund.
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Re: Dave Ramsey said what??...
Old 10-30-2006, 08:53 PM   #65
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Re: Dave Ramsey said what??...

Thanks for your replies on asset bloat and market cap question. Points well taken.
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