Long term mutual funds much worse than benchmark

[retire48in2018]

Trying to decide when/if to change mutual funds

We have a little over 2 years in cash. We have enough in zero expense cost total market index funds in brokerage account for more than 10-15 years, (0% market increase). We’re 52.


We have about same amount in traditional and Roth IRAs - maybe 50/50 - but with active mutual fund investing - (large cap, mid cap, small cap and international). We have chosen 100% stock equity for AA. Probably won’t need to touch this for many years.

Until pandemic, all active funds (IRAs) were pretty good - beating market benchmark. Last year, half of funds - way underperformed benchmark (20% worse than benchmarks)

We have considered 3 options -

1 - change out underperforming to better performing active funds

2 - change to index type funds (mutual or ETF) and accept market for long term

3 - wait 6 months and then decide if funds don’t start outperforming go to option 1 or 2 (or remain status quo - if outperforming again)

Given these should remain untouched for more than 10, maybe even 20 years - I am looking at these as long term.

When would you reconsider/select different mutual funds?

 

[audreyh1]

Don’t bother with actively managed mutual funds. You end up chasing your tail because past performance is no guarantee of future performance and they tend to have higher expense ratios, sometimes much higher. In taxable accounts they are much less tax efficient compared to index funds. Honestly you just can’t pick winners ahead of time with actively managed mutual funds.

So I recommend going with index funds - mutual funds or ETFs it doesn’t really matter so choose whichever is most convenient for you/personal preference.

As you are talking about tax deferred/tax free accounts you can make the change any time with no tax consequences.

 

[matjung]

Your option 1) sounds good to me.
I would also consider fixed income funds or balanced funds.
Equity only funds benefited a lot from low or negative interest rates around the globe.
That time is gone for good.
I would check performance at least quarterly.
If the fund gets a new fund manager, the performance my change.
If a fund beats its benchmark, the fund might have higher risk than the benchmark.
Remember. Active Funds managers don't have more talent than you or me, but get paid a lot from you for managing your money.

 

[Graybeard]

#1 so you know which active funds will continue to out perform and you'll now buy those funds with higher navs just to see them drop as they cycle from higher to lower? Index funds outperform over the long run, actively managed funds seldom outperform as they can't overcome the drag of higher expenses. You are talking about 10 to 20 years.

 

[mpeirce]

You’re going to hear this a lot around here, but stick with the low expense index funds. No reason not to.

 

[Montecfo]

If the funds have been performing i would not sweat a single year. No investment outperforms its benchmark every year.

Hopefully the funds have a longterm record of outperformance which means they are probably also low expenses or are otherwise in niche areas. If this is not the case I would re-evaluate regardless.

Indexes are better for some tasks, particularly if you seek broad market exposure. They are less appropriate for investments such as emerging markets, small caps or value for example.

 

[mpeirce]

Indexes are better for some tasks, particularly if you seek broad market exposure. They are less appropriate for investments such as emerging markets, small caps or value for example.

I would argue that for most people (Americans at least) they would be much better served sticking with a broad index fund rather than picking and choosing submarkets.

If someone has specific knowledge/experience in maybe specific overseas markets or a particular industry or even a specific company, then it might make sense to dabble. But since most people really don’t have any real insight into these areas, they should simply invest in the US economy with either an S&P 500 or total market index fund.

This gives them low expenses, broad diversification, and excellent returns over the long haul.

Of course that doesn’t give the mutual fund industry much to do, but I’m less concerned about them than investors.

 

[Rianne]

Our taxable index funds are up 7.2% from the benchmark. I consider the benchmark 2014 because we took $200k+ out to buy a house before that but left it alone since then. We stayed with the same mutual funds, with no additions and no W/D since then.

 

[big-papa]

I had heard about the active vs. passive debate for years, even as I was in an active fund that historically did quite well. Even in 2022, it did quite well. But ultimately I ditched it quite a while back. What convinced me?

The fund manager has been there since the inception of the fund in 1991

But fund managers are human. They fight with their spouse, their kids can disappoint them, they can get sick, divorced, retire and die just like the rest of us.

When that realization hit, I was out. Immediately in my tax deferred account, but opportunistically in my taxable account over the course of a year or two.

Oh and the fund manager announced his retirement not all that long ago (long after I was out) And I see they recently increased the e/r on the fund as well. ;-)

Cheers,
Big-Papa

 

[Closet_Gamer]

Since this is the active investing thread, I won't push the index approach (though I agree with it and don't use active funds.)

If you are going to do active fund investing, I would suggest:

1 - you should still maintain an AA discipline so you're not just casting about randomly for performance

2 - you should use the active components within your AA to go into more niche areas where actual knowledge might be helpful ... early stage biotech, specific emerging markets, small cap renewable energy, etc. Places where a great manager may be able to get some advantage vs. the market through deep research. These are the higher-risk, higher-reward areas.

3 - Be attentive to fees. These are the devil of active funds and can drain away any advantage the manager is able to derive.

4 - you have to maintain a very long term view of performance. What happens with a fund over the next 6 months is irrelevant. If a fund has been a dog for 7 years, it should go. But choosing the replacement is much harder as Audrey points out because past performance doesn't predict the future. To my point 2, I would only use these funds for an "explore" component of your AA.

Did I mention that I don't use active funds?

 

[arcyallen]

retire48in2018, definitely don't ditch a fund (or stock) because of a bad year. If you're comfortable with A) what the fund does, and B)how it generally does it, I'd strongly recommend looking at a 5-10 year window if you're thinking of making a change. I know that sounds grueling, but an excellent fund can underperform for years before going back to outperformance. American Funds and Berkshire Hathaway in the late 90s come to mind. Both underperformed while the markets were going crazy. Fast forward to 2002, and they looked like geniuses - they ended up doing great overall while the markets did not. The whole time they said the market was frothy, that they were value investors, and that the growth the market was seeing was unsustainable.

The B) part comes into play here - if BRK and American Funds were focused on growth and hot technology investing and were struggling, that might be a reason to ditch. But when instead they're raising their hand and saying "we're going to lag during times like these" and then -do-, I see that as a clear sign they know what they're doing.

 

[Markola]

Long term mutual funds much worst than benchmark

Logically, if some active mutual fund manager had some secret sauce or talent to beat their benchmark consistently over time, plus overcome their fees to do so, well, they wouldn’t be selling their services running a mere mutual fund. They would be focusing on making themself the richest person on earth. It cannot be done.

 

[arcyallen]

Logically, if some active mutual fund manager had some secret sauce or talent to beat their benchmark consistently over time, plus overcome their fees to do so, well, they wouldn’t be selling their services running a mere mutual fund. They would be focusing on making themself the richest person on earth. It cannot be done.

Telling me bumblebees can't fly is silly when I'm watching them fly all around me.
"But their bodies are too big!"
"Their wings are too small!"
"and they don't flap fast enough".

There are dozens of active funds I'm aware of that have beaten their benchmarks SINCE INCEPTION. Not just this year. Or during a specific, cherry-picked time period. FOREVER. Day one, start with the fund vs their index and the fund would have performed better. Period. For decades.

I'm cool with hearing theories. I like digging into them. If I find out they're solid I may share them. But the moment I find out they're false, I stop repeating them. If I kept telling people that all swans are literally white, and then I saw a black one, I'd stop telling saying that.

 

[arcyallen]

And I should point out the guidelines for this thread (which appears I also deviated from):

"To provide financial discussions that are of broader use, we have separated the “FIRE and Money” and “Active Investing, Market Strategy and Alternative Assets" (Previously Stock Picking and Market Strategy) forums. Many members wish to discuss specific opportunities and alternatives without the distraction of more popular index/passive investing methods. All members are free to post in all threads in both forums, but we ask that debating/challenging investment approaches be limited to FIRE and Money."

 

[Montecfo]

I would argue that for most people (Americans at least) they would be much better served sticking with a broad index fund rather than picking and choosing submarkets.

Investment approaches are like tools. Some work great for some tasks, less well for others.

A wise experienced investor, like a good carpenter, has many tools in his or her toolbox.

 

[Markola]

Telling me bumblebees can't fly is silly when I'm watching them fly all around me.

"But their bodies are too big!"

"Their wings are too small!"

"and they don't flap fast enough".



There are dozens of active funds I'm aware of that have beaten their benchmarks SINCE INCEPTION. Not just this year. Or during a specific, cherry-picked time period. FOREVER. Day one, start with the fund vs their index and the fund would have performed better. Period. For decades.



I'm cool with hearing theories. I like digging into them. If I find out they're solid I may share them. But the moment I find out they're false, I stop repeating them. If I kept telling people that all swans are literally white, and then I saw a black one, I'd stop telling saying that.

Of course certain funds run up a big score in their early periods when they have few dollars to deploy and virtually no customers, which then inflates their success scores forward for years. I think the OP was complaining that their funds’ recent performance has fizzled. I doubt we’re going to convince each other so good luck with your active fund investing.

 

[big-papa]

Investment approaches are like tools. Some work great for some tasks, less well for others.

A wise experienced investor, like a good carpenter, has many tools in his or her toolbox.

100% Also, what might be good enough for an average investor may not be good enough for any one individual investor.

Cheers

 

[OverThinkMuch]

We have about same amount in traditional and Roth IRAs - maybe 50/50 - but with active mutual fund investing - (large cap, mid cap, small cap and international). We have chosen 100% stock equity for AA. Probably won’t need to touch this for many years.

Until pandemic, all active funds (IRAs) were pretty good - beating market benchmark. Last year, half of funds - way underperformed benchmark (20% worse than benchmarks)

I measure my active investment against the S&P 500. Other benchmarks may be more suitable for you, but there's a risk of overfitting. If your active funds continued their outperformance going forward, how long before their overall performance beats the market again? I'd measure their prior market beats and their 20% underperformance - is that 5 years, or 15 years?

If they beat by 1%/year, maybe it takes them 10-15 years to "catch up". To me that wouldn't be worth it: I have to assume slight outperformance over a long time period. If they could, in theory, catch up in 3-5 years, I might wait.

Do any of the active funds use leverage? Do they have more tech exposure? It would also help to compare their holdings to the S&P 500, to understand the risks they took that failed them in 2022.

 

[DrRoy]

I changed to all index many years ago.

 

[HawkOwl]

What is a “long term mutual fund”? Spoken from the perspective of a buy and hold investor.

 

[VanWinkle]

Your option 1) sounds good to me.
I would also consider fixed income funds or balanced funds.
Equity only funds benefited a lot from low or negative interest rates around the globe.
That time is gone for good.
I would check performance at least quarterly.
If the fund gets a new fund manager, the performance my change.
If a fund beats its benchmark, the fund might have higher risk than the benchmark.
Remember. Active Funds managers don't have more talent than you or me, but get paid a lot from you for managing your money.

How did you determine the bold statement above? Is it a feeling you have
or do you have inside information?

VW

 

[HawkOwl]

Telling me bumblebees can't fly is silly when I'm watching them fly all around me.
"But their bodies are too big!"
"Their wings are too small!"
"and they don't flap fast enough".

There are dozens of active funds I'm aware of that have beaten their benchmarks SINCE INCEPTION. Not just this year. Or during a specific, cherry-picked time period. FOREVER. Day one, start with the fund vs their index and the fund would have performed better. Period. For decades.

I'm cool with hearing theories. I like digging into them. If I find out they're solid I may share them. But the moment I find out they're false, I stop repeating them. If I kept telling people that all swans are literally white, and then I saw a black one, I'd stop telling saying that.

Sorry, not buying it. Financial advisors, out of self-interest, hold out the promise of beating an index. But consistently beating an index? Over, say, a five year period? This New York Times reporter did not find a single example out of 2,132 mutual funds examined.

I think that genius mutual fund manager Peter Lynch managed to do it seven years in a row several decades ago. I think it is possible (although extremely unlikely) to get heads in a coin toss seven times in a row. But it requires a LOT of participants to end up with one such “genius “ winner.. good luck figuring out who that genius is in advance.




‘ Each year, some investors manage to do it, of course, but can they do it consistently? A new study of actively managed mutual funds by S&P Dow Jones Indices asked that question and came up with a startling result.

It found that not a single mutual fund — not one — managed to beat its benchmark in either the U.S. stock or bond markets regularly and convincingly over the last five years. These results are even worse than those of 2014 and 2015, when I last examined this subject closely.”



https://www.nytimes.com/2022/12/02/business/stock-market-index-funds.html

 

[retire48in2018]

What is a “long term mutual fund”? Spoken from the perspective of a buy and hold investor.

Good question. Everything invested for me is buy & hold

Don’t plan on touching these particular retirement funds for maybe 15+ years.

Brokerage account with index funds is until then

 

[arcyallen]

Sorry, not buying it. Financial advisors, out of self-interest, hold out the promise of beating an index. But consistently beating an index? Over, say, a five year period?

If any financial advisor is promising they can beat an index, they're not a very good FA. That's just not what FAs do.

Why would you pick a five year period? Why not 20 years? 40 years? Or 80 years? An actually usable time frame, not just a short snapshot in time? These funds exist. If you want pick a five year period, sure, every fund will lag over some five year period. And any given year? A total crapshoot. That's why it makes sense to generally ignore short term performance. Long term? That's a different story. You can either see the same funds outperform for a very long period of time managing money the way they say they will and say "They're executing the plan and it's working, that's why they're outperforming" or you can say "Eh, they've just been lucky for the last 20...40...80 years."

Only in money management do skeptics have the idea that this is impossible, despite it actually happening right in front of them.

 

[plex]

Just FYI, #1 is practically certain to underperform. This is basically just another form of buy high, sell low.

Each active fund has its own basket of favorite allocations, and will have slightly or greatly differing periods of highs and lows, simply because of what cycle the market is in, not so much based on which "genius" is running that fund. This is why indexing is recommended, chasing returns without understanding what you are investing in is an easy recipe for underperformance, indexing takes most of that chasing, and lack of understanding, out of the equation.