Index Fund Investors Behave More Sensibly

[Totoro]

Quote:

Originally Posted by mathjak107 you are missing the point . you can't really say index investors are any smarter since result are so individualized .

Ah, ok.

According to the article dollar-weighted returns are roughly higher by 3% annually in passive funds.

That means an average investor in passive funds there is 'smarter' in the sense that they time inflows and outflows better, in addition to a presumably lower cost.

And as far as I can tell they analyzed retail investors.

So that means that, yes, index investors as a group are 'smarter'.

Individual returns always differ from each other by definition, but this analysis says that most individuals get better returns than those investing elsewhere by a rather large margin.

So, I still disagree.

[mathjak107]

not true . there are thousands of funds out there . most we never heard of and have very little investor money .

one year they are at the top and one year at the bottom.

but then you have the middle of the pack of managed funds that have very good long term records. those funds attract most of the investor money . those funds have more investor money than some countries are worth.

the majority of investor money will be found in these constant middle of the pack good performers . they tend to be the same funds , with the same long term good records , funds like fidelity growth co , contra , etc to name some i useed for decades .

while in the lab indexing may do better than managed funds that does not mean they do better than where investors actually put their money since i will bet more than 1/2 the funds out there have less than just a couple of the mega funds.

i liken it to living here in nyc. if i go to certain areas my chances of getting mugged are pretty high. but if i avoid those areas i do not even need to know the best areas . my odds of getting mugged drop big time just by avoiding the bad areas

so like i say there is nothing that shows index investors do any better.

in fact i have never indexed and have used the fidelity insight newsletter for 25 years. based on a 100k investment in 1987 we are at 2.2 million today. a total market fund is about 450k less .

we also did it with 10-15% less risk. the fidelity monitor had even a better record using nothing but plain old fidelity funds.

http://www.reuters.com/article/2014/...0L23P520140128

[mathjak107]

the debate about indexing vs managed funds reminds me of buying a car.

you got the savvy guy who goes in to the dealership , pounds the salesman down to the lowest price then works on the finance guy for the best terms.

then a few years later he is back trading the car in at wholesale prices and buys another.

in the mean time grandma buys a car , pays more , gets a higher rate and sells the car privately at a better price.

grandma wins.


these debates are foolish and prove nothing on an individual level because of all the variables.

it is great you had the smarts to index but it sucked you had the worst tax planning structure in place and gave it all back.

you really can't compare as it is your entire plan that counts in the end and there is no wy to really benchmark that.

comparing returns in a lab is almost silly when soon as you walk out the door so many other factors carry a heavy influence if not even a heavier influence on results. .

[Totoro]

Quote:

Originally Posted by mathjak107 while in the lab indexing may do better than managed funds that does not mean they do better than where investors actually put their money since i will bet more than 1/2 the funds out there have less than just a couple of the mega funds.

Managed funds charge more management fees vs. index funds. Index funds by definition match (or lag by 0.10%) the index.

In aggregate, this means that managed funds have to underperform the index by value. This isn't lab indexing, it's unescapable math. If you add the behavorial advantage from the article (supposedly 3%), the difference only expands.

How do you square that?

Quote:

Originally Posted by mathjak107 in fact i have never indexed and have used the fidelity insight newsletter for 25 years. based on a 100k investment in 1987 we are at 2.2 million today. a total market fund is about 450k less . we also did it with 10-15% less risk. the fidelity monitor had even a better record using nothing but plain old fidelity funds. Fidelity beat benchmarks by $35 billion, but does anyone care? | Reuters

That certainly is a big difference (in a good way for you )!

Nevertheless, "anecdote is not data", to use a silly expression. None of us (I think) are saying there aren't actively managed funds that do not outperform (Berkshire and plenty of other value funds, Wellington is also used often as an example) consistently.

What we are saying is that the odds are firmly against you if one selects an actively managed fund instead of a passive index one. In addition, the expertise required to select a good fund for the long term is beyond most people's capabilities (including mine for sure).

In addition, there seems to (again, according to the article) a behavorial bias when using index funds. In which way the causality runs ('stable' investors select indexes, or indexes promote 'stable behavior') I don't know, but it's there apparently.

I suspect it's 'stable' investors => more indexing though, so it's not an inherent advantage to indexes. Just a hunch though, also driven by the fact that very few sales people actively push indexes as of yet. So people buying them tend to know what they are doing.

[pb4uski]

Found this one in MarketWatch... is it the same article? Given the title is the same and the date I would suspect so.

Are index-fund investors smarter? - MarketWatch

[mathjak107]

Quote:

Originally Posted by Totoro Managed funds charge more management fees vs. index funds. Index funds by definition match (or lag by 0.10%) the index. In aggregate, this means that managed funds have to underperform the index by value. This isn't lab indexing, it's unescapable math. If you add the behavorial advantage from the article (supposedly 3%), the difference only expands. How do you square that? That certainly is a big difference (in a good way for you )! Nevertheless, "anecdote is not data", to use a silly expression. None of us (I think) are saying there aren't actively managed funds that do not outperform (Berkshire and plenty of other value funds, Wellington is also used often as an example) consistently. What we are saying is that the odds are firmly against you if one selects an actively managed fund instead of a passive index one. In addition, the expertise required to select a good fund for the long term is beyond most people's capabilities (including mine for sure). In addition, there seems to (again, according to the article) a behavorial bias when using index funds. In which way the causality runs ('stable' investors select indexes, or indexes promote 'stable behavior') I don't know, but it's there apparently. I suspect it's 'stable' investors => more indexing though, so it's not an inherent advantage to indexes. Just a hunch though, also driven by the fact that very few sales people actively push indexes as of yet. So people buying them tend to know what they are doing.

actually ,again not true . you have expensive index funds today sold by advisors and the odds of picking a good performing managed fund is very high if you follow the money.

once you follow where investors are actually putting their money which is not in to thousands of little funds that go from top to bottom odds are pretty good you will out perform.

[Mulligan]

Quote:

Originally Posted by mathjak107 actually ,again not true . you have expensive index funds today sold by advisors and the odds of picking a good performing managed fund is very high if you follow the money. once you follow where investors are actually putting their money which is not in to thousands of little funds that go from top to bottom odds are pretty good you will out perform.

Would it be fair to assume if you were involved with that kind of advisor who would sell you expensive index funds your only other option through them would also being sold expensive loaded managed funds with worse expense ratios?
I will not contest the fact you can beat the market with managed funds. But it certainly appears to be difficult. Almost every study I have read states the funds that do beat the indexes over rolling periods are in flux and change often.
But the most important reason I have index funds is I know I will get near market averages. So in turn, this money is so boring to me, I never even bother to look at its value and have no desire to buy or sell them. Now, my individual purchases... A whole separate matter.


Sent from my iPad using Tapatalk

[Chuckanut]

Quote:

Originally Posted by pb4uski Found this one in MarketWatch... is it the same article? Given the title is the same and the date I would suspect so. Are index-fund investors smarter? - MarketWatch

Same author.

[mathjak107]

Quote:

Originally Posted by Mulligan Would it be fair to assume if you were involved with that kind of advisor who would sell you expensive index funds your only other option through them would also being sold expensive loaded managed funds with worse expense ratios? I will not contest the fact you can beat the market with managed funds. But it certainly appears to be difficult. Almost every study I have read states the funds that do beat the indexes over rolling periods are in flux and change often. But the most important reason I have index funds is I know I will get near market averages. So in turn, this money is so boring to me, I never even bother to look at its value and have no desire to buy or sell them. Now, my individual purchases... A whole separate matter. Sent from my iPad using Tapatalk

the problem is that while that old saying that 80% of funds fail to beat their indexes is true , it t is not true when you say indexing beats 80% of investors.

investors tend to flock around a certain core of long term performers that do continue to deliver good performance over the long haul.

there are really not all that many funds that have the bulk of that investor money. I would think the old 80/20 rule may apply . 20% of all those managed funds may have 80% of investor money.

that is why I say that there is a difference between beating funds vs beating investors.

[Totoro]

Quote:

Originally Posted by mathjak107 there are really not all that many funds that have the bulk of that investor money. I would think the old 80/20 rule may apply . 20% of all those managed funds may have 80% of investor money.

If it were true that those funds outperform the market, 80% of money outperforms the average, which by definition cannot be true.

Only half of the money can outperform the average, and in practice much less because of management fees.

[Edit] Found some statistics: http://d3n8a8pro7vhmx.cloudfront.net...pdf?1404994034

Smaller and younger funds typically outperform larger and older funds.

And another specifically about hedge funds: http://allaboutalpha.com/blog/2013/0...t-hedge-funds/

[MRG]

I interpreted it differently. IMHO index investors tend to follow a methodology. Give Bogle or whomever credit. Some followers of active managed funds do also. Mathjak107 gives an excellent example.

However either camp has a subset of investors that lets their emotions become a methodology. The emotional methodology always under performs. Perhaps a higher percentage of active fund investors get emotional. That's just MHO.

[mathjak107]

but from the Morningstar investor returns you can see both sides get emotional about the same

[samclem]

Quote:

Originally Posted by mathjak107 but from the Morningstar investor returns you can see both sides get emotional about the same

They don't "get emotional about the same": Investors in actively managed funds lose about 60% more than those in index funds due to their attempts to time the market. The difference results in an additional performance lag for active fund investors of .08% per month. That is not small change.

And this will be more productive if you'll stick with one line of reasoning. Either you believe that "dollar-weighted vs. overall fund performance" is a useful metric or you don't. From the above comment and numerous postings of similar info from Fido, it appears that you agree that this is a good way of knowing how closely investors are tracking the performance of the funds.
But you also wrote this:

Quote:

Originally Posted by mathjak107 you are missing the point . you can't really say index investors are any smarter since result are so individualized .

Quote:

Originally Posted by mathjak107 there is nooooo way to equate what a posted funds return has to the investors returns in those funds as a group. that is just as true in managed funds as well.

And, for what is worth, investors in managed funds have larger a larger lag in performance than do investors in index funds. (see the study linked at this post). That is, the investors in active funds underperform those funds to a greater extent than investors in index funds underperform the overall results of index funds. Add this to the additional performance lag of the managed funds themselves (caused by their costs and other things), and there's just no data-based argument that investors in managed funds, as a whole, do better (or are "smarter," I guess) than those in index funds. Quite the opposite.

[mathjak107]

nah! you would not be correct. those that drink the koolaid would like it to really be that way outside the lab BUT IN REALITY , NAH! for all the reasons i said.