JustCurious
Thinks s/he gets paid by the post
- Joined
- Sep 20, 2006
- Messages
- 1,396
I had an email exchange today with someone whom I recently met who is an "associate vice president" with a major national brokerage house. I showed him the recent study by Standard and Poor's which says that equity indices have outperformed active funds over the last 5 years (go to the link below to "indices" section of the news)
http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/PressMainPg&r=1&l=EN
He first diputed the validity of that study because he argued that only focusing on the third quarter was not enough for a meaningful comparison. I agreed with that, but pointed out that the study looked at 5 year returns as well.
He then stated that an investor in an SP 500 fund would have lost money since 2000 (he cited to the fact that the current SP500 index is lower than the March 2000 index level). I pointed out to him that the index does not account for reinvested dividends, and if he looks at VFINX (vanguard's 500 index fund), the 5 year performance is 6.8 percent, and that the average investor would have gotten respectable returns, far from losing money! I also pointed out that the total stock market index fund gained over 8 percent over the same period, and he simply ignored that.
He then argued that average annual returns are "meaningless" (yes he used that word), but he did not provide a better way to gauge performance. I then pointed out to him that everyone in the financial industry, including his own firm, extensively cites to average annual returns when they market their funds, and that surely they don't rely on "meaningless numbers."? He ignored that.
He then argued that the average investor can't ride out the market's bear markets (a valid point), but i pointed out that was not a criticism of index investing, but of investor ignorance. An investor can have an advisor who recommends index investing AND not bailing out of their asset allocation.
He then argued that because 25 percent of large cap equity funds beat their indexes, this was proof that you should select those actively managed funds to beat the index. I responded that it was very difficult, if not impossible, to know which of the actively managed funds would beat the index in the future (as opposed to what he did, which was cherry pick those in the past which did beat the index).
The bottom line is that he refused to even concede that index investing was a good idea in the face of clear evidence supporting the fact that index funds beat most actively managed funds. It reminds me of the old saying that you can't convince someone of something if their livelihood depends on not being convinced.
http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/PressMainPg&r=1&l=EN
He first diputed the validity of that study because he argued that only focusing on the third quarter was not enough for a meaningful comparison. I agreed with that, but pointed out that the study looked at 5 year returns as well.
He then stated that an investor in an SP 500 fund would have lost money since 2000 (he cited to the fact that the current SP500 index is lower than the March 2000 index level). I pointed out to him that the index does not account for reinvested dividends, and if he looks at VFINX (vanguard's 500 index fund), the 5 year performance is 6.8 percent, and that the average investor would have gotten respectable returns, far from losing money! I also pointed out that the total stock market index fund gained over 8 percent over the same period, and he simply ignored that.
He then argued that average annual returns are "meaningless" (yes he used that word), but he did not provide a better way to gauge performance. I then pointed out to him that everyone in the financial industry, including his own firm, extensively cites to average annual returns when they market their funds, and that surely they don't rely on "meaningless numbers."? He ignored that.
He then argued that the average investor can't ride out the market's bear markets (a valid point), but i pointed out that was not a criticism of index investing, but of investor ignorance. An investor can have an advisor who recommends index investing AND not bailing out of their asset allocation.
He then argued that because 25 percent of large cap equity funds beat their indexes, this was proof that you should select those actively managed funds to beat the index. I responded that it was very difficult, if not impossible, to know which of the actively managed funds would beat the index in the future (as opposed to what he did, which was cherry pick those in the past which did beat the index).
The bottom line is that he refused to even concede that index investing was a good idea in the face of clear evidence supporting the fact that index funds beat most actively managed funds. It reminds me of the old saying that you can't convince someone of something if their livelihood depends on not being convinced.