"Winning Lazy Portfolios Using Fidelity Funds

[innova]

TA is witchcraft.

There are several academic studies that completely debunk the notion that there is any value in TA. FWIW, without insider information, fundamental analysis is not a viable strategy for individual investors either. So whats a poor boy to do?

Buy it all. Invest in low-cost indexes and stop watching financial media.

You active-investors types amuse me. In the face of overwhelming evidence against you, you continue to believe in the myth that index fund returns are 'average' (in fact, they are market returns) and that you can 'beat the market'. Active vs. Passive is a zero-sum game.. do you think you have better information than everyone you are competing against in the market? The EMH (efficient market hypothesis) is very well established as an explanation of how prices in the stock market move.

Don't go bringing up Lynch or Buffet. The question is not "why can they beat the market", it is "why aren't there more guys like them"? The EMH would predict that there would be some number of participants that do 'beat the market' at the expense of others that do not.

How do you reconcile your approach with the long-standing fact that active investors underperform over 90% over long spans of time compared to their passive counterparts. Why would you want to play that game?

Let me refute in advance one more argument (I sense it coming). You may say that some active mutual funds beat the s&p 500 every year. First, that may be true for 1, 3, or 5 years. Certainly not 20. Second, the s&p consists of predominantly large-cap, growth stocks. An active fund that 'beats' the s&p 500 will often hold cash, bonds, even foreign securities. So using the s&p as a comparator is flawed. If you construct an appropriate benchmark to those active funds using low-cost indexes, the active fund still loses. It has to, due to trading costs and excessive turnover.

 

[myself]

TA is witchcraft.

There are several academic studies that completely debunk the notion that there is any value in TA. FWIW, without insider information, fundamental analysis is not a viable strategy for individual investors either. So whats a poor boy to do?

Buy it all. Invest in low-cost indexes and stop watching financial media.

You active-investors types amuse me. In the face of overwhelming evidence against you, you continue to believe in the myth that index fund returns are 'average' (in fact, they are market returns) and that you can 'beat the market'. Active vs. Passive is a zero-sum game.. do you think you have better information than everyone you are competing against in the market? The EMH (efficient market hypothesis) is very well established as an explanation of how prices in the stock market move.

Don't go bringing up Lynch or Buffet. The question is not "why can they beat the market", it is "why aren't there more guys like them"? The EMH would predict that there would be some number of participants that do 'beat the market' at the expense of others that do not.

How do you reconcile your approach with the long-standing fact that active investors underperform over 90% over long spans of time compared to their passive counterparts. Why would you want to play that game?

Let me refute in advance one more argument (I sense it coming). You may say that some active mutual funds beat the s&p 500 every year. First, that may be true for 1, 3, or 5 years. Certainly not 20. Second, the s&p consists of predominantly large-cap, growth stocks. An active fund that 'beats' the s&p 500 will often hold cash, bonds, even foreign securities. So using the s&p as a comparator is flawed. If you construct an appropriate benchmark to those active funds using low-cost indexes, the active fund still loses. It has to, due to trading costs and excessive turnover.

Well, I certainly don't have any more information than anyone in the markets, since I only use news and earnings as the way I pick stocks.
I don't do index funds anymore. All I kept doing was loosing. Since I stopped that game, I'm up about 46%. Well, CAGR would be more like 18%-19%, since I've only been doing it for not quite 2 years. So far, I've probably been pretty lucky. We'll see how I fare over the next 20 years.

 

[FinanceDude]

TA is witchcraft.

There are several academic studies that completely debunk the notion that there is any value in TA. FWIW, without insider information, fundamental analysis is not a viable strategy for individual investors either. So whats a poor boy to do?[/quote]

Care to name said studies??

Buy it all. Invest in low-cost indexes and stop watching financial media.

Hey, most folks do that on here anyways. I was hoping for a bigger nugget of advice........

You active-investors types amuse me. In the face of overwhelming evidence against you, you continue to believe in the myth that index fund returns are 'average' (in fact, they are market returns) and that you can 'beat the market'. Active vs. Passive is a zero-sum game.. do you think you have better information than everyone you are competing against in the market? The EMH (efficient market hypothesis) is very well established as an explanation of how prices in the stock market move.

Well, we all know Art G is an "active investor" as you say.

How do you reconcile your approach with the long-standing fact that active investors underperform over 90% over long spans of time compared to their passive counterparts. Why would you want to play that game?

I make decisions based on more abstract things like beta. If I can get a return thats competitive with the S&P (it doesn't have to beat it) by taking 20% less risk I'll take that all day long.

Let me refute in advance one more argument (I sense it coming). You may say that some active mutual funds beat the s&p 500 every year. First, that may be true for 1, 3, or 5 years. Certainly not 20. Second, the s&p consists of predominantly large-cap, growth stocks. An active fund that 'beats' the s&p 500 will often hold cash, bonds, even foreign securities. So using the s&p as a comparator is flawed. If you construct an appropriate benchmark to those active funds using low-cost indexes, the active fund still loses. It has to, due to trading costs and excessive turnover.

Well, until Morningstar, Lipper, and others change their rating systems to reflect that, you can continue to say how "unfair" that is, but its not going to change.

There are trading costs in index funds too........

 

[Art G]

ROTFLOL! Crack me right up! First off, check out most American Funds, almost all (if not all stock funds) have beaten the index over the last 5,10,20, whatever years. However, what we're talking about here is selective stock picking, holding cash, and looking for opportunities, and to say that can't beat the index is silly. Just because every investor isn't published in a book somewhere, doesn't mean he's not outperforming.
Selecting the S&P 500 means your only criteria is to pick the 500 biggest stocks. No consideration over results or whether or not the company makes money. If the stock underperforms, well we'll just throw out that stock and pick another coming off a good year. Buying an index fund is like going into a restaurant, asking the waiter what steak is the most tender, and him tell you, "what's the difference, it all comes from a cow".
I'll say it once more, an S&P index fund is that only fund in the world, absolutely, positively, GUARANTEED to underperform the index.
To be honest, I really don't understand why, what seems like a fairly intelligent group of investors, even bother reading this board, if your only intent is to buy the averages? Why aren't you out doing something else? Your investment decisions are done.

 

[ERD50]

Well I'm certainly not afraid of an honest test. If I'm wrong, I'm wrong. Again, the key isn't so much predicting the future, as it is taking the signals that limit your losses. I find the trick to stock selection isn't when to buy, but when to sell.
Now, if you won't give me the stock, at least find me a better chart. Find me a three year chart at the very least. Either that or give me a symbol and we can revisit it in a couple months.

Why do we need to wait a couple months?

Why can't I give you a chart (now you say three year, OK), a three year chart, say from 2001 to 2004, or 1997 to 2000, or 2003 to 2006, or 1974 to 1977. But, I don't tell you the symbol, and you tell me what you think it did next. Then we can see if you were right.

Maybe it would help if you explain your method. It seems to me, if you look at a 200 day MA, you shouldn't need much more history than that, but maybe not.

First off, check out most American Funds, almost all (if not all stock funds) have beaten the index over the last 5,10,20, whatever years.

Give me some ticker symbols. And then we need to factor out survivorship bias. Just because some of their funds may have done better on a risk adjusted basis, doesn't mean that those are the ones I would have picked at the start of the race. We need to look at all their funds that met the criteria at the start. It's easy to pick winners at the finish line.

However, what we're talking about here is selective stock picking, holding cash, and looking for opportunities, and to say that can't beat the index is silly.

You are correct, it *is* a silly thing to say that it *can't* beat the index. Of course selective stock picking can beat the index. As a matter of fact, I would expect a selective stock portfolio to beat the index about 50% of the time, even (especially?) if it was monkeys doing the picking. Logic dictates it.

-ERD50

 

[innova]

Hey, now this is getting good. *cracks knuckles*

almost all (if not all stock funds) have beaten the index over the last 5,10,20, whatever years.

What index? If you mean s&p 500, perhaps. You would really need to look at their holdings and construct a fair benchmark to be accurate. I'd be quite surprised if that would hold up to scrutiny. Perhaps I'll look into this over the weekend.

Selecting the S&P 500 means your only criteria is to pick the 500 biggest stocks.

Indexing != the s&p 500. Instead of indexing, I should say low-cost, passive investing. This may include the s&p 500, small-cap value index, EAFE, REIT index, and others.

If the stock underperforms, well we'll just throw out that stock and pick another coming off a good year.

If you believe that is how indexes are constructed, you have a lot to learn. Indexes are typically market-cap weighted, and most indexes allow a buffer zone to eliminate excessive turnover due to stocks moving up/down in size. Other passive funds like DFA's funds are not indexes per se, but mechanically constructed funds built off metrics such as PtB and CSRP deciles 1-10.

To be honest, I really don't understand why, what seems like a fairly intelligent group of investors, even bother reading this board, if your only intent is to buy the averages?

No, again you show your lack of knowledge. Index returns are MARKET returns, not average. Most investors on a whole underperform the market return by several percent, due to trading costs, excessive turnover, and taxes. Average return < market return

Are you even aware that passive vs. active is a ZERO-SUM game? Why are you arrogant enough to think that you (or your chosen fund manager) knows more than the rest of the market. Again, I submit that for them to 'win', someone else must be losing. It is a mathematical necessity. We cannot all be above-average.

Care to name said studies??

Certainly. I'll start a new thread in a bit.

I make decisions based on more abstract things like beta. If I can get a return thats competitive with the S&P (it doesn't have to beat it) by taking 20% less risk I'll take that all day long.

The only way to get return is to take risk. However, beta is not the only measure - you should consider the size and value premia as well.

I'll give you a surefire way to get s&p returns with less risk: Buy 80% s&p, 20% bond index. If you don't understand how an 80%eq/20% bond position can earn the same return as 100% equities (with less risk), you've got some reading to do.

Well, until Morningstar, Lipper, and others change their rating systems to reflect that

People place waaay too much value in rating services. Did you know that if you invest in M*-rated funds with 5 star ratings you are quite likely to underperform? Top rated funds are MORE likely than 3-star rated funds to underperform their peers in the following year. And yet, what do investors do? Pile money into the top funds, year after year. Star ratings are a great predictor of past performance!

There are trading costs in index funds too.

Absolutely. However, they are typically a fraction of active fund trading costs, and many index funds are structured in a manner to avoid frequent trading. One example is the buffer zone.. if a stock is at position 500 and falls to 501, the fund won't buy more, but needn't sell its holding in that stock either. So next year when it moves from 501 to 479 no large adjustments need be made.

 

[Art G]

Erd, I really think you are more interested in debating, than me giving you an actual answer. Go read my post again and note the word "either"., this implies you have a choice of two options.
As to the funds, I am purposely trying to allow you to pick the funds so that you don't accuse me of cherry picking. As I mentioned, pick any of the stock American Funds. If I give you symbols, you'll just tell me "sure, in hindsight that was easy", so how about if you do just a tad of research and locate any of the funds you'd like. I'll even include the S&P and Vanguard's results to get you started, down below.
As to American Funds, they've never deleted a fund, and their last new one was created in 1999, so they're not coming out with new ones monthly, oh and their history goes back to 1934. I strongly urge diversification, so I'd hate to see you only compare it to US stock funds, but I'll let you decide. Again, I'm not trying to argue this stuff with you, I'm seriously just trying to open your eyes to new ideas.

500 Index Fund Inv5.39%8.49%12.69%5.83%12.01%
S&P 500 Index*.....5.49%8.62%12.83%5.91%—

 

[Marquette]

> To be honest, I really don't understand why, what seems like a fairly intelligent group of investors, even bother reading this board, if your only intent is to buy the averages?

Innova already answered the average < market return point. However, just to address your first point, why on earth do you think that the early retirement forum is about investing? If you're interested in talking about active investing then you're better off in either the individual stock forum on here or, better, a motley fool or morningstar forum. Not saying I don't like the discussion, but your observation would be like me going to a yak rodeo and complaining that you don't know why the yak riders even bother going to the yak rodeo if they're not interested in ostrich wrangling.

 

[Art G]

innova, it's not that I don't understand what you are saying, but I'm trying to simplify things as much as possible here.

 

[Art G]

LOL! Marquette, I love it. Well to answer, the thread was about mutual funds. I'm assuming you're investing in these funds to make money, and thus this forum is about investing.
I will confess that there are some very cool threads about travel and whatnot, but it sure seems to me that the bulk of posts are about making enough money to be retired.

 

[ERD50]

Hey, now this is getting good. *cracks knuckles*

.... You would really need to look at their holdings and construct a fair benchmark to be accurate.

innova, I'd like to question this. Rather than looking too closely at the holdings, shouldn't we just measure volatility, or some other risk factor? A selection of stocks might be more or less volatile than the broad collection of them (one would expect more volatile, but it does not need to be, depending on the picks).

When DJRR was discussing FUNDX in the 'momentum' thread - it looked like M* and yahoo ranked it against MSCI EFA index, not because the holdings matched, but because the volatility matched (or so it appeared).

I agree with your comments,however there is nothing I'd like to see more than for you to be proven wrong. I'd love to find some funds or a strategy that can be duplicated with a proven track record of consistently beating an index on a risk adjusted basis. Nirvana (well, almost - there's more to life than money).

-ERD50

 

[ERD50]

Erd, I really think you are more interested in debating,

well of course I am going to 'debate' about where I put my money. I play devils advocate with myself before I make any investment.

What's the alternative? I should just 'trust you'? No thanks.

But I will look into the American Funds - thanks. - ERD50

 

[Art G]

Erd, to add, of the 14 American Funds that I would consider "stock funds", only 4 have a slightly higher beta that 1.00, the highest being 1.09

 

[Art G]

well of course I am going to 'debate' about where I put my money. I play devils advocate with myself before I make any investment.

What's the alternative? I should just 'trust you'? No thanks.

But I will look into the American Funds - thanks. - ERD50

ARRGGHHHH! I never said trust me!!!!! I said give me a better chart to look at.

 

[FinanceDude]

Hey, now this is getting good. *cracks knuckles*

It is? Ok, we know your position, care to have an open mind with others that don't share your vision??

The only way to get return is to take risk. However, beta is not the only measure - you should consider the size and value premia as well.

Thanks for the finance lecture, good thing you know so much about my background......... How much alpha is there in an index fund??

I'll give you a surefire way to get s&p returns with less risk: Buy 80% s&p, 20% bond index. If you don't understand how an 80%eq/20% bond position can earn the same return as 100% equities (with less risk), you've got some reading to do.

Good thing to know you're the only person on here that is aware of the Efficient Frontier...........

People place waaay too much value in rating services. Did you know that if you invest in M*-rated funds with 5 star ratings you are quite likely to underperform? Top rated funds are MORE likely than 3-star rated funds to underperform their peers in the following year. And yet, what do investors do? Pile money into the top funds, year after year. Star ratings are a great predictor of past performance!

Good point, and not to be nitpicky, but Vanguard's funds are also on there, so you are saying that Vanguard clients are also "doomed to failure", because they have 5 star funds on there too..........

 

[eridanus]

Selecting the S&P 500 means your only criteria is to pick the 500 biggest stocks. No consideration over results or whether or not the company makes money.

Nah, the S&P 500 isn't simply the largest stocks. A committee picks what goes into the S&P and they got it wrong in the dotcom era.

How the S&P 500's bad bubble-stock picks cost investors billions. - By Daniel Gross - Slate Magazine

"Despite perceptions, the index is not a passive investment vehicle. Instead, S&P is constantly choosing new stocks and booting old ones."

 

[innova]

innova, I'd like to question this. Rather than looking too closely at the holdings, shouldn't we just measure volatility, or some other risk factor?

I see your point, but let me ask: If you compare holdings and do apples-to-apples, isn't the return and risk(volatility) both explained? IE.. if we compare 72% LG/28% INT with s&p 500 alone, we expect a different risk (and thus different return). If they are matched (compared against 72%s&p/28% INT) , risk/return should be similar, with performance differences due to turnover, expense ratio, loads, etc... right?

I agree with your comments,however there is nothing I'd like to see more than for you to be proven wrong. I'd love to find some funds or a strategy that can be duplicated with a proven track record of consistently beating an index on a risk adjusted basis.

Hey, same here. We both know however that as soon as such a strategy was known it would be arbitraged away and you couldn't count on it for long-term results.

we know your position, care to have an open mind with others that don't share your vision??

I try, I really do. I just haven't found any evidence that suggests I'd be better off picking active funds for the long term.. and I've found mounds of evidence to the contrary. The very fact that I'm here discussing means I'm interested in what you're saying.. I just disagree and try to state my case why.

good thing you know so much about my background.........

How much alpha is there in an index fund??

I have to assume this means you are a financial advisor. Historically, folks in your profession have to learn such economic topics as EMH, Cap-M, Fama-French, etc as part of your coursework/examinations.. however, it appears the majority of practioners do not apply what they've been taught and instead engage in market-beating attempts. I find that ironic.

I'll let Bernstein engage you on the topic of alpha:
Efficient Frontier

but Vanguard's funds are also on there, so you are saying that Vanguard clients are also "doomed to failure", because they have 5 star funds on there too

Not 'doomed' to fail, but likely to fail - if your measure of success is to outperform your peers. Point here is that funds that outperform are extremely unlikely to continue to do so, year after year. This includes Vanguard's funds.

 

[Art G]

Sure, the S&P is constantly removing stocks AFTER they have underperformed. Now THAT'S a great formula for a mutual fund company. BTW, if you ever talk with most managers at mutual fund companies and ask them where their money goes, it's usually to the funds that underperformed the year before. So in essence, an index fund is doing the opposite of what most managers would suggest.

 

[FinanceDude]

Hey, same here. We both know however that as soon as such a strategy was known it would be arbitraged away and you couldn't count on it for long-term results.

DFA seems to have the closest model to that so far.........

I try, I really do. I just haven't found any evidence that suggests I'd be better off picking active funds for the long term.. and I've found mounds of evidence to the contrary. The very fact that I'm here discussing means I'm interested in what you're saying.. I just disagree and try to state my case why.

I just look at risk differently than others do.

I have to assume this means you are a financial advisor. Historically, folks in your profession have to learn such economic topics as EMH, Cap-M, Fama-French, etc as part of your coursework/examinations.. however, it appears the majority of practioners do not apply what they've been taught and instead engage in market-beating attempts. I find that ironic.

I don't engage in marketing beating attempts, but then again most of my clients are looking not to take full market risk, since they already have achieved financial success, and don't need to beat the market or what have you. What they don't have is the ambition or willingness to take FULL reponsibility for managing their own money.

 

[FinanceDude]

Sure, the S&P is constantly removing stocks AFTER they have underperformed. Now THAT'S a great formula for a mutual fund company. BTW, if you ever talk with most managers at mutual fund companies and ask them where their money goes, it's usually to the funds that underperformed the year before. So in essence, an index fund is doing the opposite of what most managers would suggest.

Gotta love that S&P stock selection committee, how can I get on that

 

[FinanceDude]

BTW, the S&P is "float weighted", not "purely" market cap weighted, but the top 10 stocks still make up 20% of the index average, so I'm not sure its a very good "index" at all any more.

 

[innova]

But I will look into the American Funds - thanks. - ERD50

Watch out for loads

One positive thing I can say about AF is that compared to their peers their operating expense ratios are definitely on the lower end. If one could find a way to purchase them without the loads it would be a reasonable choice.

Even for me, a hardcore indexer, active funds play a role. For example, in my 403b I am forced to use active funds to target certain areas of my AA because there either aren't any passive funds available period, or my plan doesn't give me the option.

One should still focus on expenses though - high expense funds are very strongly correlated with poor performance.

 

[innova]

BTW, the S&P is "float weighted", not "purely" market cap weighted, but the top 10 stocks still make up 20% of the index average, so I'm not sure its a very good "index" at all any more.

Agree.

I use TSM instead of s&p 500 as it has fewer of those issues.

 

[ERD50]

Erd, to add, of the 14 American Funds that I would consider "stock funds", only 4 have a slightly higher beta that 1.00, the highest being 1.09

Well, I started to look at a few of them. That 5.75% front-end load sure doesn't help the comparison.

After the load, I saw underperformance relative to their index. Sometime even w/o the load.

Here's the first I found that Yahoo matched to the S&P 500 index. It underperformed both w/wo the load in the 1, 3 and 5 year periods. It did manage to outperform in the ten year. How about you do the other 13?

-ERD50

VFINX
1 yr 5.39%
3 yrs 8.49%
5 yrs 12.69%
10 yrs 5.83%


AMRMX with LOAD
1 yr -2.61%
3 yrs 5.90%
5 yrs 10.16%
10 yrs 6.64%


AMRMX before LOAD
1 yr 3.33%
3 yrs 8.02%
5 yrs 11.47%
10 yrs 7.27%

 

[innova]

Good stuff. This has me thinking...

Where can you get >10 year historical data for American funds? EDIT: FOUND IT:
Files - Passive Investor | Google Groups

Take a look at the backtesting spreadsheet - you can plug in the American Funds data file and construct portfolios.

Would be really interesting to construct apples-apples portfolios and compare. My guess (just a guess, I'll have to examine this later) is that when after-load comparisons are done, American Funds don't look quite so hot.