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Old 06-29-2008, 01:39 PM   #21
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I thought that we had laid to rest a long time ago the FALSE impression that INDEXING equals S&P500.

Many of my index funds have trounced the S&P500 over the last several years.

So get this straight in your head: INDEXING DOES NOT MEAN FOLLOWING THE S&P500 INDEX. (Yes, I am SHOUTING at you!)

Indexing to me means: First select your asset allocation, then fulfill it with low-expense-ratio, passively-managed no-load index mutual funds or index ETFs. There is especially no reason to purchase an actively-managed fund in a taxable account.

If you want small caps, get small cap index fund. If you want value stocks, get a value index fund. If you want emerging markets, get an emerging markets index fund. If you want bonds, get a bond index fund.

Whatever you do with your equities, the S&P500 index is a poor choice for 100% of your equities.
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Old 06-29-2008, 02:09 PM   #22
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Just to clarify LOL! and Nords points. I have a fairly standard slice and diced diversified portfolio of index funds created after determining my AA. It contains MF/ETF's that correspond to the following indices:

FTSE All-World ex-US Index
MSCI US Small Cap Value index
WisdomTree International SmallCap Dividend index
Morgan Stanley REIT index
MSCI US Prime Market Value index
MSCI US Broad Market index
MSCI Emerging Markets index

no S&P 500 index anywhere...

Having said that, however if my 401k/b had a 500 index fund and all my other domestic LC choices were loaded, expensive actively managed MF's I'd take the index fund and "fix" my AA in my IRA or taxable account.

DD
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Old 06-29-2008, 02:16 PM   #23
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Originally Posted by LOL! View Post
Whatever you do with your equities, the S&P500 index is a poor choice for 100% of your equities.
Looking at our 401(k) investment history, I would agree. An S&P500 index is about 88% large-cap. Even a TSM index is about 72% large-cap. Is that little bit of difference that much better? It seems like large-cap stocks have not performed as well as mid-cap or small-cap stocks for quite some time.

Yeah, there was a great run for the S&P500 in the late 1990's, but an equally bad run in 2000-2002 for the index. It would seem that having less large-cap and more mid-cap and small-cap would be beneficial, but isn't that just chasing recent performance?
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Old 06-29-2008, 03:50 PM   #24
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Historically small cap and value have outperformed LC and growth over the long term. They have more risk so there is more reward. Whether this persists into the future...?

Again none would advocate 100% of your equities be S&P 500 but it could be a portion of your indexed portfolio. You could also argue that given reversion to the mean the S&P500 could be poised for better returns then others in the next 10-20 years...

DD
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Old 06-29-2008, 05:04 PM   #25
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...I don't follow mutual funds anymore so I don't know the answer to this question-- how closely do Contrafund & Low-Price Stock and your 457 resemble VFINX or the S&P500? My funds have beaten the snot out of double-inverse leveraged beever-cheeze future credit swaps, but nobody cares because they have nothing in common...
Hi Nords, would you like to share your alternatives to the "beever-cheeze"? I'm always interested in different portfolio options.
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Old 06-29-2008, 05:24 PM   #26
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Originally Posted by DblDoc View Post
Historically small cap and value have outperformed LC and growth over the long term. They have more risk so there is more reward. Whether this persists into the future...?

Again none would advocate 100% of your equities be S&P 500 but it could be a portion of your indexed portfolio. You could also argue that given reversion to the mean the S&P500 could be poised for better returns then others in the next 10-20 years...

DD
Duh - why not be buying S&P 500 hand over fist right now - especially when it's on sale - unless America has put the world on notice we are going out of business - the rush hour around Kansas City is still going strong. Why not buy what's been on sale the last few years? Why buy the expensive stuff?

A little RTM pep talk.

heh heh heh - .
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Old 06-29-2008, 05:46 PM   #27
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All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term.

Thoughts?
First of all - that is not what was being said. Some funds will beat the index, heck - the managers can't all be THAT bad! Monkeys with darts will beat the index routinely.

The problem is identifying them upfront. Jumping into one with a good track record may be just the time that it is starting to underperform. How can anyone know?

The second problem (and it appears you did NOT fall into this trap), is to compare some xyz fund with an index that with a different risk profile. No trick to get better returns if you take on more risk and volatility along with it.

It looks like those two funds have done well and the risk is in-line with the S&P. I owned each of them for a while back in the 80's.

Good luck, I hope they continue to do well for you. I'd buy some, but that would certainly result in them underperforming. I wouldn't want to do that to you - ERD50
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Old 06-29-2008, 07:00 PM   #28
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Originally Posted by DblDoc View Post
Just to clarify LOL! and Nords points. I have a fairly standard slice and diced diversified portfolio of index funds created after determining my AA. It contains MF/ETF's that correspond to the following indices:

FTSE All-World ex-US Index
MSCI US Small Cap Value index
WisdomTree International SmallCap Dividend index
Morgan Stanley REIT index
MSCI US Prime Market Value index
MSCI US Broad Market index
MSCI Emerging Markets index

no S&P 500 index anywhere...

Having said that, however if my 401k/b had a 500 index fund and all my other domestic LC choices were loaded, expensive actively managed MF's I'd take the index fund and "fix" my AA in my IRA or taxable account.

DD
I pretty much agree with the indexing crowd, but what if I wanted an emerging markets fund and there was one with a 40 year track record of beating the Emerging markets index? Im not talking about switching to whichever fund beats the emerging market index the past year. im talking about one that has beaten it last year, the last 3 years, the last 5 years..10 years....20 years...ect.

You would still have a problem picking that fund instead of the index fund?

PS..I doubt there is an emerging market index or a fund thats 40 years old. This is just an example.
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Old 06-29-2008, 07:13 PM   #29
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Hi Nords, would you like to share your alternatives to the "beever-cheeze"? I'm always interested in different portfolio options.
In another thread I noted that all portions of our AA seem to be dropping with equal acceleration, so this may not be for the faint of heart. We recently rebalanced by selling some of our Berkshire Hathaway and buying a Dow dividend ETF.

Disclaimer-- I have a military COLA pension, and spouse will get hers in 2022. As a result we spend less than 4% of our ER portfolio and we feel comfortable with a high equity allocation. We've actually tested our volatility tolerance during the 2000-2002 markets so we're not sweating it this time. We also keep a couple years' expenses in cash so that we don't have to sell off our ER portfolio into a bear market. So, having said that, our ER portfolio is:
23% Berkshire Hathaway (currently selling at a 52-week low)
24% Powershares International Dividend ETF (PID, down 13% YTD)
22% Dow dividend ETF (DVY, down 18% YTD and 28% off its high)
22% small-caps made up of 16% S&P600 small-cap value ETF (IJS) plus a few percent each of spouse's TSP "S" fund, a regional bank ETF (KRE), and a couple individual stocks. KRE is getting hammered particularly hard; down about 30% in the last eight months.

The other 9% is in a money-market fund and long-term CDs. We go for 3-5 years when interest rates make sense, and we hope that we don't have to break them. We're good for a while yet.

Our 15-year-old has been putting her salary into T. Rowe Price's International Equity Index (PIEQX, about the only fund company that'll custody a minor's Roth IRA). She'll max that contribution this year, and she's also considering starting a taxable account with Fidelity's Spartan Extended Market Index fund (FSEMX). Not sure how we're going to work around Fidelity's minimums, but this is a chance for them to catch a customer young and hold her for a very long time. I hope they take what she's willing to give...
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Old 06-29-2008, 07:34 PM   #30
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Nords, thanks very much for presenting your portfolio. I'm glad you put in the disclaimer because it's very much a part of the risk profile you've chosen. Looks well thought out.

Somewhere above I mentioned some of our portfolio. We're very much dependent on stocks/bonds as we don't currently take SS and are planning on holding off to a riper age (maybe 67). So I try to play it fairly safe with an AA of 55/45 and a 2:1 US/intl stock ratio. The assets are in funds that spread the risk over the style boxes with a bias towards large cap right now. Probably pretty conventional. The YTD performance is around -4.6% for the portfolio exclusive of spending. We spend more then 4% of the portfolio, probably will be a little more the 5% this year. Too many trips to Whole Foods I guess (plus we are paying college costs for DS).

I've got my seat belt cinched for the ride .
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Old 06-29-2008, 07:58 PM   #31
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We're 40% US / 40% Int'l / 20% mid-term bonds

It's a mix of actively managed / index funds, but partially because we have good 401(k) options that happen to be managed.

But, we're working and 10-15 years from an ER with a SWR of 2.5%.
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Old 06-29-2008, 08:30 PM   #32
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I pretty much agree with the indexing crowd, but what if I wanted an emerging markets fund and there was one with a 40 year track record of beating the Emerging markets index? Im not talking about switching to whichever fund beats the emerging market index the past year. im talking about one that has beaten it last year, the last 3 years, the last 5 years..10 years....20 years...ect.

You would still have a problem picking that fund instead of the index fund?

PS..I doubt there is an emerging market index or a fund thats 40 years old. This is just an example.
LOL. Ohh you are testing my resolve...Well the standard answer would be that past performance doesn't predict future returns, and in the history of MF's no one has beaten an appropriate index for anything close to that long so it is heading for a fall. All that said it would be mighty tempting wouldn't it .

DD
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Old 06-29-2008, 08:33 PM   #33
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We're 40% US / 40% Int'l / 20% mid-term bonds

It's a mix of actively managed / index funds, but partially because we have good 401(k) options that happen to be managed.

But, we're working and 10-15 years from an ER with a SWR of 2.5%.

Similar here but all index funds (my employer uses Vanguard and Fidelity) and bonds are equal mix short/Int and TIPS and targeting ~ 10 years from now with SWR of 3.5%.

DD
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Old 06-30-2008, 06:38 AM   #34
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I pretty much agree with the indexing crowd, but what if I wanted an emerging markets fund and there was one with a 40 year track record of beating the Emerging markets index? Im not talking about switching to whichever fund beats the emerging market index the past year. im talking about one that has beaten it last year, the last 3 years, the last 5 years..10 years....20 years...ect.

You would still have a problem picking that fund instead of the index fund?
It would really depends on what you mean by "beating the ... index." If this was in a taxable account, I would be worried about after-tax result where over the long-term it's a higher hurdle to overcome an index fund with low turnover.

But I'll give you an interesting case to me. I have CFICX in my 401(k) so no tax consequences for me and no front-end load for me. It's an intermediate-term bond fund with a ranking of number 1 in 1998, 1999, 2001, and 2003. However, it was ranked 95 in 2000 and 92 in 2002. See this link. It basically looks like an awesome bond fund to have even with it's extremely high turnover rate. Somehow has made only 3% in the last year while vanguard inter-term bond index has made more than 8%. See this link.

The problem is that the bad years hurt you much more than the good years help you. Your particular return will depend heavily on when you buy as well, so you could have a bad year when the fund has a good year.

I've learned that I'm better off in an index fund even when the actively managed fund has good numbers.
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Old 06-30-2008, 07:30 AM   #35
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With interest rates so low as well, bond funds for me don't seem as desirable right now, even to mitigate risk. In a couple more months, as the Fed is preparing to raise rates, it may be more appropriate to move into cash/MM/CDs as opposed to the bond funds as raising those interest rates were certainly hurt the allocation. Just my two cents, take them as you will.

Pretty much agree with everyone here saying that it depends on what your AA is, what index you compare it to and the risk/volatility you are willing to endure. I don't think anybody says it is impossible to beat the S&P over the long haul, or even for a very long time, it is just that it is nearly impossible to predict it beforehand which one will be the fund that does it. Testing out the waters in different funds is costly as it encourages you to jump off the ship too early if the fund is actually good and move around. Index funds don't intend to beat the benchmark, they are the benchmark. They give lower expense ratio, so while you are waiting for market returns (sounds like such a negative phrase, especially for active fund enthusiasts, I actually think it's a positive phrase), you aren't being sucked dry.
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Old 06-30-2008, 09:57 AM   #36
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But I'll give you an interesting case to me. I have CFICX in my 401(k) so no tax consequences for me and no front-end load for me. It's an intermediate-term bond fund with a ranking of number 1 in 1998, 1999, 2001, and 2003. However, it was ranked 95 in 2000 and 92 in 2002. See this link. It basically looks like an awesome bond fund to have even with it's extremely high turnover rate. Somehow has made only 3% in the last year while vanguard inter-term bond index has made more than 8%. See this link.

The problem is that the bad years hurt you much more than the good years help you. Your particular return will depend heavily on when you buy as well, so you could have a bad year when the fund has a good year.
I'm not sure that you are drawing the right conclusions from this example. I notice that CFICX has a pretty short duration at the current time for an intemediate bond fund, 3.1 yr versus 6.1 yr for VBIIX. So when rates went down you'd expect VBIIX to outperform. When rates go up the situation will probably reverse. It's very difficult to choose time periods to successfully compare funds that use different strategies to get results.

This case does bring up an interesting point. If you were invested in VBIIX last year and believe that a good strategy now is to shorten durations then you'd put your money in CFICX. Personally I think real rates are going to have to go higher and so does Bill Gross who has 56% of HABDX in cash.
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Old 06-30-2008, 10:36 AM   #37
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Active fund managers comparing their track record to the S&P 500 Index is one of the biggest lies perpetrated on average Joe investors. The other is past performance. Someone please tell me how I can buy past performance so I can call it quits and head to the beach.

There are some active funds for which the S&P 500 is an appropriate benchmark, but for many it has no use at all as a benchmark.
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Old 06-30-2008, 10:47 AM   #38
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I'm sorry, I'm too lazy to actually put any love and research into this post.

Two bond funds that were investing in highly-rated issues. One an index fund by Vanguard. One a managed fund by Fidelity(?) CDO collapses and fund investors found out that the managed fund was trying to juice returns just a little bit by adding junk.

There can be problems with paying people to overthink too.

In spite of that, I carry Dodge and Cox for US large-cap and DFA for international in my 401(k). I sleep pretty good at night.
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Old 06-30-2008, 12:12 PM   #39
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I pretty much agree with the indexing crowd, but what if I wanted an emerging markets fund and there was one with a 40 year track record of beating the Emerging markets index? Im not talking about switching to whichever fund beats the emerging market index the past year. im talking about one that has beaten it last year, the last 3 years, the last 5 years..10 years....20 years...ect.

You would still have a problem picking that fund instead of the index fund?

PS..I doubt there is an emerging market index or a fund thats 40 years old. This is just an example.
Yes I would. Why should I believe that the fund will continue to beat its index in the future? Just b/c it did so in the past?

- Alec
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