Index funds vs aggressive growth funds

[Moleskin Moyer]

Got into a discussion with a friend about index funds versus aggressive growth funds. I got Vanguard index funds and have about $400K invested. The funds have been returning a total of $20K a year for the past two years. My friend has invested about $110K in several aggressive funds that returned about $15K a year for the past six years. He says despite the high expense ratios and the annual $1K in fees his returns are justifiable. He thinks I should make the switch from my Vanguard stuff to his stuff.

Me switching over seems pretty good. What implications am I not considering here?

 

[pb4uski]

So he claims to have funds that returned 13.6% annually (15/110) over the last 6 years? Ok, I'll bite.... what are the tickers for these magic funds? I suspect that he is full of you-know-what.

 

[RunningBum]

First, 2 years vs 6 is a different time frame. We had a very nice run up until last year. Compare the two portfolios over the same time period and you'll get a better comparison, though 2 years isn't very long.

Second, there's more risk with those aggressive growth funds. He's probably taking a beating this year. Index funds haven't been doing great either, but are probably more stable.

You haven't said anything about which funds either of you are in, so I won't presume that one is more diversified than the other. But IMO you should look for good diversification to better protect against big losses. You may also miss out on bigger gains. That's really up to you on how much risk you want to take, but I would want to understand more about what the fund invests in more than just what it has returned the past few year.

Chasing returns on funds often isn't a good game to play. There are always some managed funds that beat indices, but very, very few that will do it consistently, and usually not by much.

 

[Senator]

Yep, as fast as they go up, they go down even faster.

 

[samclem]

Me switching over seems pretty good. What implications am I not considering here?

There are LOTS of issues. As noted previously, the reporting period is different. Second, how much of your/his returns are due to dividends vs cap gains (dividends will be steadier if the stock prices go down). The cost of the funds matters, and so does the cost (if any) of the advice needed to get in/out of these "hot" funds.
Ask for details on the fund names/ticker symbols.
Stay with indexing.

 

[LOL!]

One can always buy aggressive growth index funds.

But until you name the funds, we cannot go look up the past performance and tax characteristics and make comparisons to appropriate index funds.

And one wants to make sure that one gets the highest risk-adjusted return and not just the highest return.

 

[Moleskin Moyer]

Second, how much of your/his returns are due to dividends vs cap gains (dividends will be steadier if the stock prices go down).

I have a slight understanding of dividends vs capital gains when it comes to taxes. Why does one fund return dividends while another fund returns in capital gains?

 

[Totoro]

Got into a discussion with a friend about index funds versus aggressive growth funds. I got Vanguard index funds and have about $400K invested. The funds have been returning a total of $20K a year for the past two years. My friend has invested about $110K in several aggressive funds that returned about $15K a year for the past six years. He says despite the high expense ratios and the annual $1K in fees his returns are justifiable. He thinks I should make the switch from my Vanguard stuff to his stuff.

Me switching over seems pretty good. What implications am I not considering here?

Reporting period. Downside risk: Was the fund lucky or smart? And how do you know any outperformance will continue? How bumpy was the ride?

On the reporting period: 15k a year is roughly 10% a year, or +81% in total.

The S&P right now is about 2020 points. To get a 81% return you would have to go back to .. August 2010 when it was at 1050. Less than six years ago. And that's excluding dividends.

Stick to the tracker.

 

[samclem]

I have a slight understanding of dividends vs capital gains when it comes to taxes. Why does one fund return dividends while another fund returns in capital gains?

It largely depends on the type of stocks (really, the companies they represent) that each fund owns. If your friend is really getting the returns you are reporting (sorry, but it is unlikely), then the funds are invested in some highly speculative companies, the kind that don't pay dividends.

See if you can get the ticker symbols. My guess is that he'll have an explanation for why it's not convenient to find out his true performance ("Oh, I've only had these particular ones for a short time. You've got to jump in and out as the market demands, so I move to the 'best' funds when I need to." Etc)

It sounds like you've got a lot more money than he does, there may be a good reason for that. But his broker may have a nicer car than yours does.

 

[mystang52]

I know 2 people that are likely compulsive gamblers. Whenever I see either of them, invariably they mention the latest big win they hit on. Funny, they never discuss the losses. This Aggressive Fund investor sounds just like them, especially since he did not mention the funds' names and as already mentioned is using a different timeframe.

Sorta related, I have an approx 50-50 allocation. My portfolio goes up and down with the markets, but it is so comforting to not see huge swings....especially when the market goes down. That's my emotional constitution and why I sleep at night. Nothing has changed; there is no free lunch in investing.

 

[RunningBum]

I have a slight understanding of dividends vs capital gains when it comes to taxes. Why does one fund return dividends while another fund returns in capital gains?

Dividends come directly from the dividends paid by the stocks held by the fund. Aggressive growth stocks usually reinvest their profits into their own business rather than pay dividends, so aggressive growth funds have few, if any, dividends.

Capital gains are the result of sales within the fund. Index funds tend to be buy-and-hold, and rebalance by investing new money received into the growing stocks. Aggressive funds have more turnover, so selling off winners trigger capital gains which usually need to be distributed to the fund holders.

Total return is what's important, whether it's from dividends, cap gains distributions, or increased share price. There are a few people who focus on the dividend stream instead, so I won't say total return is the only way to go, though it's what I pay attention to. Let's not get side tracked on that.

 

[ERD50]

... Ok, I'll bite.... what are the tickers for these magic funds? ...

... See if you can get the ticker symbols. ...

Yes, please. That is where the rubber meets the road. Let's actually see how they did, if you had invested in them at different times.

I googled the terms "funds that beat indexes last 5 years" and looked into these articles:

Fund Manager Ab Nicholas Has Been Beating S&P 500 for 40 Years - Bloomberg Business

https://www.washingtonpost.com/news...any-mutual-funds-ever-beat-the-market-hardly/

Which led me to tickers: NICSX, SSSFX, HDPSX

You can compare them to SPY, for total return here (move the slider to see different time frames). Those very select funds (out of thousands) often do better than SPY, but usually not by much, and sometimes SPY leads. Was your friend smart/lucky enough to pick those few funds, and a the right time?

edit/add:Forgot this link:

http://stockcharts.com/freecharts/perf.php?SPY,NICSX,SSSFX,HDPSX


But please - ticker symbols!

-ERD50

 

[walkinwood]

To the OP - before doing anything with your investments, read a book on Mutual Funds. Bogle's "Little book on Common Sense Investing" is a good place to start.

I once listened to friends and acted on what they claimed without doing my own learning. It hurt me badly, but fortunately got me on the path of learning about investing. After a disastrous detour trying to outdo the market in the late 90s (and thinking I was a genius at the time), I've come to my senses and buy index funds for all new investments.

While you will get sound advice here, having the better understanding that comes from your own reading will help you stay the course when doubts arise.

Good luck.

 

[Animorph]

The last 6 years have been pretty much all recovery from 2008, not a wide variety of possible market behavior. Of course aggressive growth will look good during a recovery. But get into it now and you might be just in time to see aggressive growth do worse than average as equities tumble. One reason why "chasing performance" doesn't work, even if the stats of "index" versus aggressive growth are as described.

Looking over the past 15 years might be better, but can you be sure the funds will be managed the same way in the next 15 years? That would require 30 years of manager stability for one thing. And even then past and future market conditions won't match exactly.

If you have a broad index fund you have aggressive growth as well as value covered. No need to adjust your AA every 5 years.

 

[easysurfer]

Got into a discussion with a friend about index funds versus aggressive growth funds. I got Vanguard index funds and have about $400K invested. The funds have been returning a total of $20K a year for the past two years. My friend has invested about $110K in several aggressive funds that returned about $15K a year for the past six years. He says despite the high expense ratios and the annual $1K in fees his returns are justifiable. He thinks I should make the switch from my Vanguard stuff to his stuff.

Me switching over seems pretty good. What implications am I not considering here?

I bet when you go to a restaurants with him to order a nice no frills hamburger on a bun, he tries to get you to order one with all the garnishes?

 

[CaliforniaMan]

So then every time someone mentions they have a hotter portfolio than yours you are going to switch? Can't image what could possibly go wrong with that technique.

 

[travelover]

Here my 30,000 foot view. If someone actually knows how to get fantastic returns, they don't need to run seminars, manage a special fund or do anything except invest their own cash and watch it grow to the sky, then retire early.

Anyone else is blowing smoke.

 

[RetireAge50]

No magic needed. A simple S&P 500 fund returned 13% per year over the last 6 years.

 

[gerntz]

Invest in an agressive growth index fund.

 

[Exrook]

Best answer to your friend I can think of:

Warren Buffett slips but still winning epic hedge fund bet

 

[Chuckanut]

Me switching over seems pretty good. What implications am I not considering here?

For starters you are comparing two years at what may include the end of a powerful bull market to six years of participation in that bull market. You must compare time periods, exactly. This is investing 101. Run from anybody who doesn't understand that comparing returns from different time periods is misleading.

 

[CRLLS]

You see it everywhere, "Past performance does not necessarily predict future results." Simple as that, IMO.

 

[pb4uski]

No magic needed. A simple S&P 500 fund returned 13% per year over the last 6 years.

More like 12.2% for VFIAX for 3/14/2010 to 3/13/2016 with dividends reinvested. However, VIGAX was 13.5% for the same period.

 

[RetireAge50]

Cool. The 13% was 6 years ending 12/31/15 with dividends reinvested.

 

[pb4uski]

Sorry, I typed it wrong and fixed it above.