The Three Fund Portfolio

[Qs Laptop]

Great! Welcome aboard. The prize contest is bragging rights .

Is there a dedicated thread to this contest?

 

[38Chevy454]

For example, in 2017 Morningstar's Active/Passive Barometer shows that 46% of active funds beat passive funds; in 2018 the number was 38%. While not a majority, that's a far cry from the paltry 5% advantage you are claiming over 50 years.

By my math, .46 x .38 = .17; so after 2 years only 17% of the funds are ahead. Sure you can argue that of the 46% in 2017, 8% dropped out and that resulted in the 38% for both years 2017 and 2018 being ahead of the passive results. But I sincerely doubt that analogy. I think more likely is that of the 46% in 2017 dropped to be 17% in 2018 that are ahead of the passive results. Do the math out for 5 or 10 years and you see that very few will be ahead at that time.
You can do what you want with your money. I'll take the passive approach, and be happy with market avg returns.

 

[SecondCor521]

Is there a dedicated thread to this contest?

Yup, it's linked earlier in this thread. Or you can search for "Beat Boho 3.0" and that should find it.

 

[samclem]

Do the math out for 5 or 10 years and you see that very few will be ahead at that time.
You can do what you want with your money. I'll take the passive approach, and be happy with market avg returns.

Right, but you know how this line of reasoning always goes: "Sure, that's true for nitwit investors who don't know how to move to the funds that will win next year. I can reliably spot the winners, and I invest in those. You just have to do a lot of research, be really smart, and be gutsy."

The same thing happens when you point out that the average investors in actively managed funds do worse than the funds themselves (which, in turn, generally lag index funds of similar attributes). "Yes--see! They zig when they should zag. I'm not like that!"

 

[Qs Laptop]

Yup, it's linked earlier in this thread. Or you can search for "Beat Boho 3.0" and that should find it.

D'oh!

 

[redduck]

Do you really believe monkeys know the difference between heads and tails on a coin?

Good question, aja8888. But, it's not a matter of what I believe. Let's talk science here.


FYIO, aja8888..

The monkeys involved in the research were vetted. Monkeys that could tell heads from tails were excluded. No need to additionally contaminate a pre-doomed research project. How this ever got funded remains a mystery to me. But, that's besides the point and we don't want to go off on a tangent.

However, since you show an an unusual amount of interest in this research let me share some more little-known information about this project:

There were a number of events during the trial that were not anticipated.

1. Monkeys chose to bite into the coins before trying to flip them. Most of the monkeys after biting into the coins seemed disappointed or angry and simply threw the coins away. Some of the coins hit other monkeys which caused angry posturing and occasional hitting.

2. Another problem arose when some of the male monkeys gathered the thrown coins (before the researchers could get to them) and offered female monkeys the coins (for what reason I do not know). However, if a female monkey declined accept the coins, a whole lot of screeching occurred, causing the researchers to weep.

3. The monkeys did not understand the concept of bathroom breaks (causing the researchers to retch).

4. The monkeys, early on in the experiment, divided on philosophical grounds, into two camps. Even though they couldn’t tell heads from tails, let alone flip a coin, the two groups become extremely agitated with one another about the meaning of having a coin land on the same side twice in-a-row. Was it luck or was it skill?

aja8888, thanks for asking me something that I know about.

 

[aja8888]

Duck...I am in awe of your vast knowledge on this historical event!

 

[2177V]

You are invited to show us how you happily go on beating the market over the next couple of years.

http://www.early-retirement.org/forums/f44/stocking-picking-contest-v3-0-a-97638.html

No need to show us past data or anything, just simply see how well you stack up against a total stock market index fund and others in the contest.

I think you should start a separate thread since this thread is all about the Three Fund Portfolio.

 

[easysurfer]

I think you should start a separate thread since this thread is all about the Three Fund Portfolio.

My apologies. Didn't mean to hijack the thread. Only to invite Qs Laptop.

Looking back, probably should have sent a PM instead (of course, the that may have been thought of as spam).

Anyhow....we now turn back to the Three Fund Portfolio topic .

 

[ERD50]

...

Here is a better analogy. There are some baseball players that can hit a lot of home runs. There are some that cannot. When an MLB team goes to draft day and is looking to pick the best players, do they consider spending their time, effort, and money to pick an average player? Because over time it will simply average out that we will win the World Series... .

And here is where I think that analogy falls apart...

Sure, we can find a player/stock that has above average history, easy, just check the stats. Agreed?

OK, now what? Certainly, the 'market price' for that above average player/stock will be... above average. So now the question becomes, will their future performance continue to be enough above average to justify the above average price we paid?

Wait, what was that word I underlined? "Future"? Seems like we need a crystal ball, and lacking that, I know of no skill set that allows one to predict the future. And that is why the stats show what they show - that there is a low chance of beating the average.

It's like when you hear the commentary after an Earnings Report - "xyz stock went up today, because they beat expectations". Hmmmm, well whose expectations were they? If we need to rely on exceeding expectations, then what good are our expectations?


Hey, if someone can show me a way to reliably do better than average, I'm all ears. I'd love to do better than average. But if it isn't definable so that it can be tested to be repeatable, it isn't really of any value to others.

-ERD50

 

[samclem]

Hey, if someone can show me a way to reliably do better than average, I'm all ears. I'd love to do better than average.

Over virtually any significant period, it is easy to beat the average investor >or< the average actively managed fund--just buy the market and pay as little as possible in fees.

Now, if we want to beat the market, that's more demanding.

 

[Qs Laptop]

And here is where I think that analogy falls apart...

Sure, we can find a player/stock that has above average history, easy, just check the stats. Agreed?

OK, now what? Certainly, the 'market price' for that above average player/stock will be... above average. So now the question becomes, will their future performance continue to be enough above average to justify the above average price we paid?

Wait, what was that word I underlined? "Future"? Seems like we need a crystal ball, and lacking that, I know of no skill set that allows one to predict the future.

Predicting the future is not possible. But there is throwing ones hands in the air and saying, "no point in trying to beat the market, can't be done, just buy the index" and also the fact that some people DO beat the market. It's all about which group of people you want to be in. Give in and be average because there's no point in trying or try to be better than average.

And that is why the stats show what they show - that there is a low chance of beating the average.

Well, if you consider a 46% chance in 2017 to be low or 38% in 2018, or even a 24% chance over the past 10 years to be low, sure, give up and accept average returns. I don't consider a 46% chance to be low.

Hey, if someone can show me a way to reliably do better than average, I'm all ears. I'd love to do better than average. But if it isn't definable so that it can be tested to be repeatable, it isn't really of any value to others.

-ERD50

Of course it's definable. With equities you need to beat Vanguard's total stock market index. Or with US stocks beat Vanguard's S&P500 index. For fixed income investments you must beat the total bond index.

 

[RobbieB]

My stock pickin' dude has been beating the market (S&P500) for 4 years straight now including his 1% fee. With serious qualified dividends at low tax rates.

 

[pb4uski]

...or even a 24% chance over the past 10 years to be low, sure, give up and accept average returns. ....

So... 100% chance of average returns vs

24% chance of above average returns and 76% chance of below average returns.

I'll take the 100% chance of average returns.

 

[Running_Man]

Over virtually any significant period, it is easy to beat the average investor >or< the average actively managed fund--just buy the market and pay as little as possible in fees.

Now, if we want to beat the market, that's more demanding.

What is the market? If I did decide to beat it. With 3.7 unique index passive funds I am unsure which one to beat

 

[pb4uski]

What is the market? If I did decide to beat it. With 3.7 unique index passive funds I am unsure which one to beat

3.7? You're not losing it on us are you?

 

[flintnational]

Predicting the future is not possible. But there is throwing ones hands in the air and saying, "no point in trying to beat the market, can't be done, just buy the index" and also the fact that some people DO beat the market. It's all about which group of people you want to be in. Give in and be average because there's no point in trying or try to be better than average...........

My son reminds me that if someone is trading, they are competing against Goldman Sachs, large professionally managed endowments, professionally managed pension funds and hedge funds. All have full time MBA analysts, super computers and virtually unlimited investment funds. If there are assets that are under priced, they will know about them before you do. Even if active trading worked, you nor I are likely to be the winners.

I try not to get hung up on the terminology. Achieving index returns puts you in the elite of the investing world. Few, including some of those listed above, achieve index returns. The more likely risk is not achieving market returns.

Many of those advocating passive investment on this forum are sophisticated long term investors. In many cases they are risk takers and excel in their chosen field and they excel at investing. Yet, they came to the conclusion that this approach provides the best returns. Not average or sub par returns. They are not settling. They are taking the path that is likely to lead to success. And they are avoiding sub optimal results which tend to be the norm.

ETA: I am using index and market interchangeably. Not just the S&P. IMO, your benchmark should be the index that covers your investment(s). Small cap index for small cap funds, International index for International funds, Total market index for total market funds, tech sector index for tech funds, etc.

 

[Dtail]

One more angle to consider.
If one does beat the "market" 24% of the time, by how much % does one beat the average returns, vs. the 76% one is below the "market", by how much % is one below the average returns?

 

[24601NoMore]

I was curious, so downloaded the M* Active/Passive Barometer report. The data in favor of active is even WORSE than is being discussed here. For example, here are the percentages of active funds that outperformed passive over a 10-year period:

- US Large Blend: 10.9%
- US Large Value: 8.3%
- US Large Growth: 8.3%
- US Mid Blend: 11.9%
...etc

The only numbers I see in the 10-year column over 20% are Small-Cap (avg 27.5%), Foreign, EM, RE and FI (Intermed Bond, Corp Bond and HY Bond).

This has been my experience over 30+ years of investing as well. I (foolishly, IMHO) invested pretty heavily in some Oakmark funds (OAKMX and OAKIX) 10+ years ago because of what at the time was market beating returns and a lot of fawning press coverage, including from M* who still to this day rates them both as "Gold" funds. Now, these are two of the absolute worst funds I own - OAKIX is down 15.83% over the past year, 9.5% below the MSCI ACWI Ex-US bogie and 8.78% below it's category average. Oh, and that's with "star" manager David Hero, who M* awarded "International Fund Manager of the Year" multiple times. OAKMX is just as bad..under the S&P 500 by 10.74% over the past year..2.1% 3-yr avg..3.03% 5-yr average and even -0.28% 10-year..quintile rank is bottom 65+% for YTD, 1, 3, and 5 years. It's not until the 10-year average it gets above the top 25%..

Note that I do think there are categories (FI, SC, RE) where active can outperform passive (and the M* data bears this out), and for this reason invest in some PIMCO FI funds..but my SC and RE are still indexed, as I haven't been able to find compelling funds in either category that I'm convinced will be long-term (multi-decade) performers.

YMMV, but for at least Large and Mid-cap funds, it's worth looking at the 10-year data and asking yourself if you can consistently pick funds in those categories that will beat the <10% chance of outperformance. Even if you do manage to pick them, what about the next decade? Study after study has shown that even this year's/decade's top performers don't consistently outperform - just look at OAKIX, OAKMX and hundreds of other examples..

Best of luck..

 

[pb4uski]

.... Note that I do think there are categories (FI, SC, RE) where active can outperform passive (and the M* data bears this out)...

+1 There is room for active managed funds in more narrow parts of the investing universe... I recently bought some Wellesley to get the benefit of their expertise in FI.... but for the vast majority of my AA index funds are better.

 

[Qs Laptop]

One more angle to consider.
If one does beat the "market" 24% of the time, by how much % does one beat the average returns, vs. the 76% one is below the "market", by how much % is one below the average returns?

Precisely.

 

[easysurfer]

My feeling is that I don't want to spend all my time researching and evaluating, so the simple index funds do better than I would probably do based on minimal time investment. The three fund portfolio works well for almost all.

+1

If I do spend all the time researching and evaluating, no guarantee I'd even do any better than simple index funds. More than likely, I won't do any better.

The cruise control of simple index funds works well for me.

 

[24601NoMore]

+1 There is room for active managed funds in more narrow parts of the investing universe... I recently bought some Wellesley to get the benefit of their expertise in FI.... but for the vast majority of my AA index funds are better.

Wellesley is a great example a fund that one would buy not because of a desire to outperform the market, but for other reasons - including risk reduction and lower volatility. It's also a pretty rare example of a fund that delivers consistently (not necessarily on an outperformance basis, but on a "sleep well at night" one) over multiple decades..

Depending on your own goals, VWINX/VWIAX can be a great fund to complement a three-fund portfolio.

Will be interesting to see what happens with the recent changes in fund management..I'm hopeful as Wellesley has been a great "sleep well at night" fund for those in or near ER for a very long time..I often think of Wellesley as the tortoise in the Tortoise and the Hare tale, and that's just fine by me as I'm not shooting for the fences in terms of returns, but looking for lower volatility with good, proven funds that consistently help pay the bills..

 

[OldShooter]

...
Well, if you consider a 46% chance in 2017 to be low or 38% in 2018, or even a 24% chance over the past 10 years to be low, sure, give up and accept average returns. I don't consider a 46% chance to be low. ...

This is why the casinos and lotteries will never go out of business. Some claim that the people who play these games are simply innumerate, but I think it is more basic: Evolution has bred us to think we are exceptional and to be optimistic. Innumeracy helps, though.

 

[ERD50]

Predicting the future is not possible. But there is throwing ones hands in the air and saying, "no point in trying to beat the market, can't be done, just buy the index" and also the fact that some people DO beat the market. It's all about which group of people you want to be in. Give in and be average because there's no point in trying or try to be better than average. ....

There certainly is a point where you can reasonably decide to stop trying to beat the market. And that is when the data tells you your odds of doing it consistently are not good enough to make it worthwhile.

That's not just "throwing ones hands in the air", it is making an informed decision.

.... Well, if you consider a 46% chance in 2017 to be low or 38% in 2018, or even a 24% chance over the past 10 years to be low, sure, give up and accept average returns. I don't consider a 46% chance to be low. ....

Well, as mentioned earlier, we would need to know "beat by how much" to analyze those numbers. I've seen the numbers that 85% of active funds over 5 years fail to beat the market after fees. So a 15% success does not look good to me. And again, by how much?

.... Of course it's definable. With equities you need to beat Vanguard's total stock market index. Or with US stocks beat Vanguard's S&P500 index. For fixed income investments you must beat the total bond index.

Yes,the benchmark is easily defined, but when I said 'definable", I meant the approach, the strategy. If it isn't something that can be objectively defined and repeatable by others, it really isn't of any value to anyone else.

My stock pickin' dude has been beating the market (S&P500) for 4 years straight now including his 1% fee. With serious qualified dividends at low tax rates.

That's good for you, but how can anyone have any assurance this will continue? Can other people get this? If you PM'd me his contact info, would he give me some audited records to prove what he has done? Seems to me if an FA could reliably beat the market, he'd keep a reference account under his name (or anonymous), so that he could easily prove what his past returns were. But I'm not aware of any FA doing this.

And after all, we would certainly expect that some managers would beat the market for 4 or more years. That would be expected even with a group of dart throwing monkeys. I don't say that to denigrate the money managers, it's just simple probability/statistics.

What is the market? If I did decide to beat it. With 3.7 unique index passive funds I am unsure which one to beat

I'm assuming you mean 3.7 K (3,700) funds? I think that's a bit of a straw man. One can easily select a Total Market fund/ETF, there are a few big ones, they track extremely closely to each other, and that's what we are talking about.

... I (foolishly, IMHO) invested pretty heavily in some Oakmark funds (OAKMX and OAKIX) 10+ years ago because of what at the time was market beating returns and a lot of fawning press coverage, including from M* who still to this day rates them both as "Gold" funds. Now, these are two of the absolute worst funds I own - OAKIX is down 15.83% over the past year, 9.5% below the MSCI ACWI Ex-US bogie and 8.78% below it's category average. ...

Best of luck..

... Many of those advocating passive investment on this forum are sophisticated long term investors. In many cases they are risk takers and excel in their chosen field and they excel at investing. Yet, they came to the conclusion that this approach provides the best returns. Not average or sub par returns. They are not settling. They are taking the path that is likely to lead to success. And they are avoiding sub optimal results which tend to be the norm. ....

Exactly. As I mention above, this is an informed decision by people who generally understand and take risks where warranted. It's not a "oh, poor me, I don't know any better, I'll settle for average".

-ERD50