Scot Burns article today on Index vs Managed..

[Cut-Throat]

We have had this discussion before in this forum. About beating index funds. Here is Scott Burns take on it. He mentions some funds that have been discussed here.

http://www.dallasnews.com/sharedcon...umns/2004/stories/092104dnbusburns.92850.html

 

[trumpeting_angel]

grinning. . . Scott covers in one column what it took Bogle or Bernstein or Larry Swedroe a whole book (each) to describe! Well, that's a bit facetious. But he does sum it up rather neatly, doesn't he?

Anne

 

[John Galt]

Scott Burns is my No. One financial commentator,
in any media. He gives you stuff you can use, and
does it without being verbose. Almost
Hemingwayesque.

JOhn Galt

 

[azanon]

Those statistics would be pretty conclusive if an investor were forced to randomly pick their actively managed fund.  In that scenario, you're looking at..... what did he say?  30% chance of beating the index.

Whew!   So glad I can actually avoid not picking the consistent losers, losers being both individual funds and fund companies.

Yes scarcam, but its important this site not lose the reality that the index vs active management debate is still there.  With a little homework, and a quality mutual fund company like Fidelity, T. Rowe Price, or American Century, I think your odds will be a little higher than 30%. That guy mentioned Magellan. Well hells bells, its too big now to manuever and beat the indexes. Most of my guides recommend medium sized mutual funds.

I've said a few times now, investor fees, at least as they relate to just management fees, is only a very minor factor/stumbling block to ER.  There are far more important things that will keep you from getting there.  For example, being in the wrong "kind" of fund, is a much much worse mistake;  (ex.  using bond funds over 30 years instead of stock funds).

 

[John Galt]

Hey!!!! I'm using bond funds over 30 years instead of stock funds. But, it's at the end of my life as opposed
to the beginning of saving for ER. Now, if I had gotten the ER inspiration when I was 30.............what would I have done?? Interesting (but academic) question.

John Galt

 

[unclemick]

Back to my original thesis - if you
are male, live in America - it's biological and incurable.

The best I've been able to do(in thirty five plus years) is to bench mark balanced index and putz with side money - mainly DRIP dividend stocks for the last fifteen years. Before index - there was gold, rental real estate, timberland,, multi asset class via mutual funds, etc.

This debate will never die - one because it's biological and incurable: and two because as Ben Graham and Warren Buffett pointed out - one (or a few) stocks can trump a lifetime of good solid value investing. If I believe Bernstein (fifteen stock diversification myth) - the odds are way better than the lottery.

 

[azanon]

I just dont see it as being that big a deal, is my only point.  What i think really matters is making sure you invest all you can, max as much as possible your retirement vehiches, and choose a smart weigthing/percentage in stocks.  Whether you go active management or index i dont think will matter that much;  Especially if you pick at least a few mutual funds, and not just one.   Sure 1% less return "can" have a nasty hit to your portfolio, but for someone who's maxing out, it'll only be the difference between retiring really early, and retiring early.

Hey!!!!  I'm using bond funds over 30 years instead of stock funds.  But, it's at the end of my life as opposed
to the beginning of saving for ER.  Now, if I had gotten the ER inspiration when I was 30.............what would I have done??  Interesting (but academic) question.

Well John, its still not too late.  And unless you're over 110 years old, i recommend you still have some stock.  Risk and the market is a funny thing;   we all know the risks of being "in" the market.  However, not as many people talk about the risk of "not" being in the market.   I bet the 90s were brutal for you to watch "on the sidelines".  

At the very least, surely you can live with 20-30% in a dividend stock fund.    It'd really enhance your return, and hardly even affect your risk.  Plenty of studies on that.

 

[azanon]

Another thing i'd like to mention is index funds have no defense against a year 2000 "crash" or degredation, whatever you want to call what happened.. Surely there were some (active) fund managers that recognized the crash that was occurring, which didnt happen overnight, and as a result took defensive positions within their respective funds (going to cash, selling internet stocks, etc). If you're indexing, that obligation completely falls on you because your stock index fund will always remain fully invested.

 

[wabmester]

Surely there were some (active) fund managers that recognized the crash that was occurring,

Good point. So, how do you pick the fund manager who will predict the next crash? And is it harder or easier than predicting the next crash yourself?

 

[ESRBob]

Two less-conventional thoughts on this front:

a) I don't love the s&p500, even though I do love indexing.  I think we should compose a balance of large cap and small cap ourselves with the latter comprising a much bigger percentage than any of the major or broad indexes contain.  Why?  Small cap trounces large cap over long periods of time -- more risk, more reward.  Ok in a well-diversified portfolio.

b) Value -- I also think we should be tilted toward value vis-a-vis a major stock index, eg. SP500-- (anything to get away from hype-infested large growth stocks, I guess).  And, although value indexes exist, value managers may have a role.  why?  Value stocks are not a permanent group.  Although some stocks remain value stocks for years, many get re-classified as value stocks when they get beaten up.  They  might not make it into a value index at all (if only temporarily beaten up for a few quarters or so) or they might not make it in until the next year when the index gets re-jiggered.

Plus, you have the problem of not knowing if you are buying an Enron which went to flatline, or a Tyco, which went from 50 down to 8 and is now back above 30.  Even though we can all argue the virtues of indexes, a value manager might be able to distinguish between the Enrons and the Tycos with enough analysis, frequently enough to warrant their fee.  Barrow and team at Windsor II seem to outperform the Value Index by a point or so pretty consistently, even over long periods of time.

I view picking an actively managed value fund not so much as active fund picking or stock picking that Scott Burns so rightly pokes fun at, but more as a smarter way of indexing Value than the 'dumb/passive index" which is snapshotted annually.  Anyone else thinking along these lines?

ESRBob

 

[azanon]

Good point.   So, how do you pick the fund manager who will predict the next crash?

I dunno, but I know the chance i pick a manager that predicts a downside trend and acts on it is greater than me picking an index fund that can do that, cause any percentage beats 0% (which would be the case for an index fund).

And is it harder or easier than predicting the next crash yourself?

You're asking if me, a biologist, can pick market weakness better than MBA educated fund mangers making 6 and 7 figures?  I dunno;  who would you trust if you had to pick between the two of us;  me or one of them?  

My experience has been similar to cut-throat's;  so far i've been my worst enemy.

......

I think one thing that has to be considered here too is how much you have to invest. I think if you're under 100K in assets, active manage funds are very attractive. If you're nearing retirement, and/or have 500K+, then you're paying a whole lot more for the same services and other options start looking more attractive. I dunno, when i get to that point, i might be more inclined to shift to individual stocks than to go index funds.

 

[wabmester]

I know the chance i pick a manager that predicts a downside trend and acts on it is greater than me picking an index fund that can do that, cause any percentage beats 0% (which would be the case for an index fund).

I think you're close to solving the puzzle of why index funds usually outperform active funds.

Assume most active managers try to time the market. Assume 50% of them get the exit timing right. Assume 50% of them get the re-entry timing right. That means the chance of a random active fund getting both right is 25%. In other words, chances are that 75% of funds that try to time the market will underperform an index fund, which is pretty close to what actually happens.

Then add in the extra costs associated with higher fees and higher turnover, and you start to get an idea of why so many people are yammering on about low-cost passive indexing.

Of course, this is from somebody who enjoys trying to time the market (about once a decade), so I don't really buy the logic either

 

[charlie]

Hey ESRBob,

You may recall that I follow the "coffeehouse"
allocation in my IRA. I chose to use Vanguard's
Large Cap Index instead of Index 500 for the
Large Growth corner and I substituted Windsor II
for Value Index for the very reason you mentioned.

Big Whoop! .......... today the NAV of my IRA passed
the value it had on 1/1/04. That's after drawing
$20,400 YTD for living expenses.

Cheers,

Charlie

 

[John Galt]

Hi Charlie! My IRA NAV is up also, but only because I
haven't drawn anything yet.

John Galt

 

[trumpeting_angel]

I think the financial press and financial services companies have pressed their (lucrative for them) ideas on us for so long that we are simply unable to believe the research. Or perhaps the managed-fund advocates simply believe that all the research is cooked (reading too many of TH's posts!).

I am grateful to have discovered that someone has actually done research to address these questions, and that it was available for me to discover when I inherited money.

I have funnelled my doubts about the future of the markets into further diversification, into actual real estate. Wish me luck; I know I'll need it. TH's advice regarding THIS was to bulldoze the house I just bought off the cliff in the back yard. . .

Where is TH, anyway? Is the baby coming soon, or what?

Anne

 

[wabmester]

I am grateful to have discovered that someone has actually done research to address these questions

Now that the cat is out of the bag, and index funds are the investment du jour, somebody will find a way to exploit this, and some new type of fund will consistently outperform the indices.   It's already happening to some extent as information about index composition changes leaks out and investors rush to exploit the information, which punishes the index funds.   Fun stuff, eh?

 

[azanon]

Here's an example of a safe non-index fund that i've owned about 9 years now:  American Century Equity Growth Fund (BEQGX).  

Basically, their goal is to mirror, but slightly "enhance" the performance of the S&P500.  Basically, they pull it off.  The expense ratio for the fund is a relatively low 0.70%.  But despite that, looking at 10 years from today, they've beaten the index by 0.23% even taking into account the higher expense ratio of the active management.  What's also important to note is that "index funds" still have their .2% expense ratios, so that's really about a 0.43% victory over an S&P500 Index fund.  

You think an extra 0.43% isnt worth bothering for?  Try comparing maxed IRA's for 30 years with an extra 0.43% on a financial calculator and get back to me.  Also, even if they dont do quite that well the next 10 years, its clear they'll be darn close to the S&P500 even in a worst case scenarion just based on their investment method of mirroring the index.

Azanon

note:  Looking into this at MSN investor caught my eye to something you have to be real careful about.  You cant just type in the ticker of the fund you're looking at then throw an index on top of it for comparison.  At MSN investor if you do that on a 10 year graph, the S&P500 looks like it destroys that fund.   BUT, if you go to the statistical charts, you'll see BEQGX actually beat the S&P500 index by 0.23 on 10 years.   Apparently, the graphs for BEQGX arnt taking into account the dividend/capital gains distributions, is my guess.

Someone spoke of male egos. I'm guilty. I like knowing i'm just a little bit better than the average smuck.

 

[db]

Our portfolio:
40% VTSAX
20% VGTSX
15% VGSIX
15% VBISX
5% VWEHX (tax mananged high yield)
5% Cash
was up about 5% YTD at the end of Q3.

I realize this portfolio may be too heavy in REIT index, but VGSIX just keeps churning out those dividends.

db

 

[db]

YTD Q3 ROI is 4.5%, not 5%.

db

 

[cute fuzzy bunny]

Has anyone done any clean research on the performance of index vs managed funds during bad streaks like after the depression or the 1965-75 time period?

I'm slightly skeptical of the index (particularly balanced index) performance back slapping right after a 10 year bull market in stocks combined with a bull market in bonds.

 

[Cut-Throat]

Has anyone done any clean research on the performance of index vs managed funds during bad streaks like after the depression or the 1965-75 time period?

I'm slightly skeptical of the index (particularly balanced index) performance back slapping right after a 10 year bull market in stocks combined with a bull market in bonds.

TH,

FireCalc is basically index based so you could play around with that period there. I'm betting an index portfolio would have done quite well against a heavy tech portfolio during the Tech Melt down of 2000-2001 though

 

[unclemick]

Sans data - if index funds were to disappear - I would have no problem with a low turnover/low expense/not 'star manager' - value fund that had been thru several business periods - say twenty years minimum.

Even then, I would lean toward balanced - ala Wellington, Wellesley, Dodge and Cox balanced.

I wouldn't even get overly fixated on performance - my predjudice being the short end - durable income(divs/interest).

 

[unclemick]

BTY - even Bogle derailed Wellington for period (go-go 60's and early 70's) before he woke up and went back to value.