I'm starting to warm up to Index Funds

[Nords]

Originally Posted by FinanceDude

Come on, noone on here would DARE own Berkshire, it's NOT an index fund, and is concentrated in only a few stocks besides.............

Actually, over the last decade while no one's been watching, it's become an insurance company that happens to own 40-some subsidiaries.

Stocks are well into the minority now. According to their latest quarterly report they hold ~$55.5B in equities on a balance sheet of ~$240B-- about 23%. (Nearly $30B of that $55.5B is unrealized gains.) At today's price of ~$107,700 for an "A" share their market cap is about $166B-- still only about 33%.

Compare that equity holdings of $55.5B at a ~$26B cost basis to "only" about $37B cash on hand. Looks more like a mutual fund with a bloat problem to me!

Originally Posted by Mwsinron

Im fairly sure someone here owns BH.

It's up over 22% YTD. Nearly 32% of our retirement portfolio and over 50% of our 14-year-old's college portfolio. We'll probably have to do something about that soon.

[eridanus]

Originally Posted by Nords

Another equivalent to a large mutual fund with a great long-term record would be Berkshire Hathaway.

True, and it's done exceedingly well when compared to the S&P. It's also very tax-friendly. I used to hold it but sold recently, fearing the inevitable (?) slide when Buffett kicks off.

[FinanceDude]

I would include large consumer conglomerates in that as well.

Like Proctor&Gambel............whether you like them or not, they own a bazillion companies that make products you use everyday.

About 5 years ago, I conducted an experiment. I counted all the things I had in my house that were from P&G...............38 items..............

[justin]

Like 3 yrs said, Vanguard gives you the index return minus expense ratio. If they deviate far from that, I'll be unhappy. Vanguard's actively managed funds - they give you professional active management for 20-50 basis points in most cases (small, large, foreign, domestic). Let's not even compare Vanguard bond funds to anyone else. Wouldn't be a fair fight.

Financedude, hope you (and you're clients) are ready for those massive American Fund capital gains distributions.

http://www.americanfunds.com/resourc...ndex.htm?r=h_c

New Perspective Fund - between 5%-7% of assets (I'm getting zinged on that one, too).
SMALLCAP World Fund - 7%-9% of assets.

Index funds are much more tax efficient.

[azanon]

Originally Posted by 3 Yrs to Go

The management fees are so high because . . . people are still willing to pay them!

Hope springs eternal! What's 80bp per year when you have the opportunity to massively outperform the indexes? That's the thinking, anyway. The fact that almost nobody has been able to accomplish that feat for any significant length of time is an inconvenient detail that gets in the way of the hopes and dreams of nearly every investor. Who, after all, is content to be just average?

But the higher fee is just one contributor to the inferiority of actively managed funds. The other is taxes. That fancy portfolio manager with all his highly paid analysts don't just run up the fees. They are paid those fat salaries to buy the next big thing and sell the last big thing. But in their pursuit of "alpha" they inevitably end up churning the portfolio and dredging up taxable gains that index investors largely avoid.

Exactly, and I'm starting to accept this by being honest with myself. I'm going to convert most of them, but i might leave one or two "specialist funds" such as my American Century International Bond Fund. The fees for that one isnt that bad, and I doubt vanguard even has an equilivant to it (Foreign Bond Index).

[FinanceDude]

Originally Posted by justin

Like 3 yrs said, Vanguard gives you the index return minus expense ratio. If they deviate far from that, I'll be unhappy. Vanguard's actively managed funds - they give you professional active management for 20-50 basis points in most cases (small, large, foreign, domestic). Let's not even compare Vanguard bond funds to anyone else. Wouldn't be a fair fight.

Financedude, hope you (and you're clients) are ready for those massive American Fund capital gains distributions.

http://www.americanfunds.com/resourc...ndex.htm?r=h_c

New Perspective Fund - between 5%-7% of assets (I'm getting zinged on that one, too).
SMALLCAP World Fund - 7%-9% of assets.

Index funds are much more tax efficient.

I rotated out of New Perspective awhile back. Smallcap World was bound to do it as some point.

On another point, I have always made a conscious attempt NOT to put a lot of money into funds this time of year. I wait until AFTER the gains are paid out to shareholders to record BEFORE putting new money in.

Capital World Growth and Income has some pretty big embedded gains, but so far they've been able to work around it.

BTW, just a question: How much research does it take to buy the S&P 500 Index??

[justin]

Originally Posted by FinanceDude

Capital World Growth and Income has some pretty big embedded gains, but so far they've been able to work around it.

BTW, just a question: How much research does it take to buy the S&P 500 Index??

"Capital World Growth and Income" is in the 5-7% range as well unless you know something that American Funds isn't saying on their website.

What do you mean how much research does it take to buy the SP500 index? To determine a proper asset allocation which would include the SP500 index?

Or to do the physical buying and selling required to track the index? Could be simple, could be complex. Vanguard and others will use statistical techniques to get a sample of some of the smaller, less well represented stocks in some funds (like total market index, which "typically holds the largest 1,200–1,300 stocks in its target index (covering nearly 95% of the index’s total market capitalization) and a representative sample of the remaining stocks").

Of course you probably asked the question rhetorically, since you're a FA and already knew the answer.

[Mr._johngalt]

Originally Posted by FinanceDude

I counted all the things I had in my house that were from P&G...............38 items..............

I counted all the things that were S and M...........13. Oops..........
forgot the dog collar, make that 14.

JG

[mathjak107]

its good to do both, index and active management. index funds are fine in an up market but anyone who owned index funds thru the early 2000's needed nerves of steel with those drops. the better actively managed funds fell no where near the indexes.

indexes are to weighty in the over valued stuff and shun the undervalued stuff because the higher the stock or sector goes the more it dominates the indexes

Originally Posted by mathjak107

its good to do both, index and active management. index funds are fine in an up market but anyone who owned index funds thru the early 2000's needed nerves of steel with those drops. the better actively managed funds fell no where near the indexes.

Yeah, if you were holding those high-tech sector managed funds you didn't need nerves of steel, because you just had massive cardiac arrest!

[mathjak107]

sector funds for sure , but we are talking well diversified funds not sector funds.

splitting your money between active and index funds seems to me to be the smartest way to go. im still all activly managed but eventually i think i may do a little index thing besides .

[ats5g]

Gee, my mid cap, small cap, and bond index funds outperformed their respective managed funds in the "bear market."

- Alec

[astromeria]

Originally Posted by ats5g

Gee, my mid cap, small cap, and bond index funds outperformed their respective managed funds in the "bear market."

So did my money market account

[. . . Yrs to Go]

Originally Posted by mathjak107

its good to do both, index and active management. index funds are fine in an up market but anyone who owned index funds thru the early 2000's needed nerves of steel with those drops. the better actively managed funds fell no where near the indexes.

indexes are to weighty in the over valued stuff and shun the undervalued stuff because the higher the stock or sector goes the more it dominates the indexes

I've heard this, but don't really buy it . . . that active managers outperform in down markets. It's possible that the cash drag of active managers helps some in down markets, but then they lose out on the return. So at best that seems a wash. At worst, if you figure up markets outnumber down markets by 8 to 1 (or so) that cash drag really works against you.

Besides, why should active managers be any better able to pick winners in down markets than up markets?

I also don't believe that indexes over-weight over-valued stocks and under-weight under-valued ones. If they did, active managers should very easily be able to beat the markets, but they haven't been able to. Sure you can construct a "value weighted" index that outperforms in retrospect, but how will it perform in the decade to come? The truth is, if some simple screen for value were all it takes to beat the market, those active managers would be earning their higher fees by producing excess returns.

[. . . Yrs to Go]

Originally Posted by FinanceDude

On another point, I have always made a conscious attempt NOT to put a lot of money into funds this time of year. I wait until AFTER the gains are paid out to shareholders to record BEFORE putting new money in.

What do you do next year, or the year after that, and the year after that, and . . . ??

Seems easier to buy a tax efficient index fund.

Originally Posted by FinanceDude

BTW, just a question: How much research does it take to buy the S&P 500 Index??

Not sure I understand your point. But, obviously it takes no research at all to buy the S&P 500. I guess from your post, you see this as a criticism. I happen to see this as an overwhelming virtue. The genius of index funds is that all you active managers pay the full freight of "research" while we indexers get to enjoy the benefits as a free ride.

Keep up the good work, and thanks for your contribution.

[FinanceDude]

Originally Posted by 3 Yrs to Go

What do you do next year, or the year after that, and the year after that, and . . . ??

Seems easier to buy a tax efficient index fund.

I guess I should have clarified that I meant lump sum investors. I have yet to meet a client that wants to pay someone else's gains, so typically I'm not going to dump a lump sum into funds that are about to pay out a capital gain, as the NAV or MOP will be adjuted downward on the share price. Happens the same way with stock prices the day a dividend is paid, the price drops by the amount of the dividend.

I don't think it was Warren Buffett, it might have been Peter Lynch that said:

"Capital gains are the result of doing well, and capital losses are not"


Not sure I understand your point. But, obviously it takes no research at all to buy the S&P 500. I guess from your post, you see this as a criticism. I happen to see this as an overwhelming virtue. The genius of index funds is that all you active managers pay the full freight of "research" while we indexers get to enjoy the benefits as a free ride.

Keep up the good work, and thanks for your contribution.

[/quote]

[FinanceDude]

Originally Posted by 3 Yrs to Go

Not sure I understand your point. But, obviously it takes no research at all to buy the S&P 500. I guess from your post, you see this as a criticism. I happen to see this as an overwhelming virtue. The genius of index funds is that all you active managers pay the full freight of "research" while we indexers get to enjoy the benefits as a free ride.

Keep up the good work, and thanks for your contribution.

I was making a point..........index funds SHOULD have very low expenses, and they better. After all, there's no research being done, the committee that decides the stocks which stay and go every year isn't run by Vanguard as far as I know...........

I prefer ETFs to Index Funds, I guess I am a minority on that front but to me, I have more flexibility doing that, and it has worked well for me, like selling QQQ on a downtick and buying SPY, etc, etc...........

[. . . Yrs to Go]

Originally Posted by FinanceDude

I guess I should have clarified that I meant lump sum investors.

No, I understood your point. But if you're investing in an actively managed fund that churns the portfolio you're going to get hit with higher taxable gains year after year - even if you avoid the first year's payout on your initial purchase.

To your second point, higher capital gains distributions need not reflect higher total returns. As a matter of principle, I'd rather have unrealized tax-deferred gains than realized taxable gains. Keep churning that portfolio and watch your after-tax returns dwindle in comparison to a tax-efficient index fund!