Again Low Fee Index Funds Beat Active Managed

[38Chevy454]

Saw this morning, and thought I would post here. Excerpt cut from the article:


"According to S&P Dow Jones Indices Risk-Adjusted SPIVA Scorecard: Year-End 2020, after adjusting for volatility, the majority of actively managed domestic funds across market-cap segments underperformed their benchmarks on a net-of-fees basis over mid- and long-term investment horizons."


Link to article below. Not anything folks here will learn from, pretty much a fluff piece buit does have list of example low cost index funds. Just has the confirmation of low fee index funds beat higher fee active managed funds over the mid and long term timing.


https://finance.yahoo.com/news/guide-low-cost-index-funds-184923526.html

 

[tdv2]

Saw this morning, and thought I would post here. Excerpt cut from the article:


"According to S&P Dow Jones Indices Risk-Adjusted SPIVA Scorecard: Year-End 2020, after adjusting for volatility, the majority of actively managed domestic funds across market-cap segments underperformed their benchmarks on a net-of-fees basis over mid- and long-term investment horizons."


Link to article below. Not anything folks here will learn from, pretty much a fluff piece buit does have list of example low cost index funds. Just has the confirmation of low fee index funds beat higher fee active managed funds over the mid and long term timing.


https://finance.yahoo.com/news/guide-low-cost-index-funds-184923526.html

No surprises....the evidence has been there all along....it's a zero sum game. In aggregate active funds must underperfom the market by the fees and expenses they incur. It's just simple math. I really don't understand why many refuse to accept this.

 

[VanWinkle]

Index funds make investing simple- 2-3 index funds in the allocation that works for you. You can get on with life, not spend all your time researching investments with a slim chance of beating the index. If you like trying to beat the odds, congrats to you and good luck. I'd rather be at the golf course and traveling to my kids in Colorado and Washington state.

VW

 

[Montecfo]

Well, that does it!

I am not going to invest in "the aggregate" of actively managed funds!

 

[OldShooter]

... I am not going to invest in "the aggregate" of actively managed funds!

Exactly! That is the logical takeaway from the SPIVA reports. The next sentence, also logically, is to say "I am going to invest with the above-average managers."

How to find those above-average managers? The most popular technique is to chase performance. That is foundation of the industry's advertising. For those who favor that approach, S&P has a report for you, too: The "Manager Persistence" report, also published every six months. Sadly, they are all the same: For any period, the top managers' results for the following period are at hardly better than random and more typically worse than random. The mantra is always proven true: Past performance does not predict future results.

That's the dead end; no one knows how to predict which managers will be above average in the future. Here's Nobel winner Eugene Fama's long time research partner Ken French with a short video discussion: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Links:
S&P SPIVA gateway: https://www.spglobal.com/spdji/en/spiva/#/
S&P Manager Persistence gateway: https://www.spglobal.com/spdji/en/indexology/core/persistence-scorecard/

 

[Markola]

There’s the benchmark average returns and there’s the (terrible) average returns of all mutual funds. I’ll take the average benchmark returns any day.

 

[Chuckanut]

Here's the latest SPIVA statistics:

https://www.spglobal.com/spdji/en/research-insights/spiva/

Most large caps still can't beat the index.

 

[OldShooter]

... Most large caps still can't beat the index.

Not just large caps. All stock pickers. Here's the math from a Nobel winner: https://web.stanford.edu/~wfsharpe/art/active/active.htm and interview here: https://www.ishares.com/us/insights/etf-trends/qa-with-nobel-laureate-william-f-sharpe-on-indexing

 

[FREE866]

yep. As someone else pointed out I'm fine with market returns. Even if they are half the historical average the next 10-20 years I will still reach my goal. All I need.

Simple. Minimal cost . Tax efficient.

 

[RetiredAt49]

I had a significant amount of my assets with an AUM wealth management company for the past 1.5 years…. I just fired them and am moving to a 2-3 low cost index fund portfolio.

The company I used benchmarked themselves against the MSCI World index and YTD they are down 5 percentage points lower then their benchmark!

 

[ncbill]

If you want actively managed pick either Vanguard's Wellington or Wellesley (for more income)

Forget all the rest of the actively managed funds.

 

[retire to nature]

recently, I found etrade active management report for 2011. I wanted to check how it would be now. some funds are not even existing now. I stopped using them after my divorce and changed to S&P index fund. I should have fired it even before the divorce.

 

[F.I.R.E User]

My then EJ FA wouldn’t agree.

 

[OldShooter]

recently, I found etrade active management report for 2011. I wanted to check how it would be now. some funds are not even existing now. I stopped using them after my divorce and changed to S&P index fund. I should have fired it even before the divorce.

Every year something north of 7% of stock picker funds are folded or merged due to poor performance and, consequently, investors bailing out. These funds are buried very deep by their former managers; it is almost impossible to find lists or any history of them. That is why it is important that performance studies consider "survivorship bias" as SPIVA does.

My then EJ FA wouldn’t agree.

Of course!

Almost a century ago, Upton Sinclair told us: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Since then, nothing has changed.

 

[F.I.R.E User]

Every year something north of 7% of stock picker funds are folded or merged due to poor performance and, consequently, investors bailing out. These funds are buried very deep by their former managers; it is almost impossible to find lists or any history of them. That is why it is important that performance studies consider "survivorship bias" as SPIVA does.

Of course!

Almost a century ago, Upton Sinclair told us: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Since then, nothing has changed.

Right.

 

[JBTX]

While I always knew this I think Buffet said it most intuitively - and I am paraphrasing here.

You have active investors, and passive investors. By definition the passive investors performance follows active investors and equals the sum total of all active investors, which simplistically puts it at 50%. Now subtract active management fees and it is mathematically very difficult for active managers to even match index funds over the long term.

 

[OldShooter]

While I always knew this I think Buffet said it most intuitively - and I am paraphrasing here.

You have active investors, and passive investors. By definition the passive investors performance follows active investors and equals the sum total of all active investors, which simplistically puts it at 50%. Now subtract active management fees and it is mathematically very difficult for active managers to even match index funds over the long term.

Exactly. The average active manager is guaranteed to underperform.

So. an intelligent guy says: "I get it. I have to hire an above-average manger in order to win." I have posted this link a number of times: Dr. Ken French on identifying superior managers: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

For those who want a little meatier chew, here's a productive way to spend 37 minutes: Dr. Eugene Fama on "Investors from the moon.":https://www.top1000funds.com/2015/12/investors-from-the-moon-fama/

 

[Koolau]

If you want actively managed pick either Vanguard's Wellington or Wellesley (for more income)

Forget all the rest of the actively managed funds.

Yep. The only managed funds I'll touch.

Other than that, low fee index funds are the way to go - as they have been since index funds were invented. Good to know some things don't change. YMMV

 

[Markola]

A more emphatic headline would be, “Active Funds Lose to Low Fee Index Funds - Again.”

 

[Stormy Kromer]

Index funds make investing simple- 2-3 index funds in the allocation that works for you. You can get on with life, not spend all your time researching investments with a slim chance of beating the index. If you like trying to beat the odds, congrats to you and good luck. I'd rather be at the golf course and traveling to my kids in Colorado and Washington state.

VW

So true.

I wish I learned this years ago. Like in high school.

Thank you.

 

[Montecfo]

Not just large caps. All stock pickers. Here's the math from a Nobel winner: https://web.stanford.edu/~wfsharpe/art/active/active.htm and interview here: https://www.ishares.com/us/insights/etf-trends/qa-with-nobel-laureate-william-f-sharpe-on-indexing

Paul Krugman is a Nobel Prize winner and is right about as often as a broken clock.

Myron Scholes and Robert Merton would soon share a Nobel prize but not before nearly collapsing the US financial system (See "When Genius Failed: The Rise and Fall of Long-term Capital Management"). Forgive me for not being wowed by what a Nobel Prize winner says about financial markets.

 

[OldShooter]

Paul Krugman is a Nobel Prize winner and is right about as often as a broken clock.

Myron Scholes and Robert Merton would soon share a Nobel prize but not before nearly collapsing the US financial system (See "When Genius Failed: The Rise and Fall of Long-term Capital Management"). Forgive me for not being wowed by what a Nobel Prize winner says about financial markets.

Wow! An ad hominem attack on basic arithmetic. You don't see those very often.

@Montecfo, pray tell what flaws you see in Dr. Sharpe's arithmetic.

 

[Montecfo]

Wow! An ad hominem attack on basic arithmetic. You don't see those very often.

@Montecfo, pray tell what flaws you see in Dr. Sharpe's arithmetic.

There was no attack. I am simply skeptical of the appeal to authority, for reasons I noted.

And not sure why basic arithmetic requires such an appeal.

 

[OldShooter]

There was no attack. I am simply skeptical of the appeal to authority, for reasons I noted.

And not sure why basic arithmetic requires such an appeal.

Identifying the author of a paper is an "appeal to authority" ??!! Print a pdf, black out Sharpe's name, and the conclusion is the same. As the paper points out, it's just arithmetic.

Regarding "appeal to authority" generally, isn't the alternative to avoid authority and to rely on unqualified people's opinions instead? Are you arguing that information provided by someone who has expertise in a particular subject is to be avoided?

Hard to understand.

 

[ER Eddie]

Thanks for posting. Glad to hear the confirmation. Sometimes I have doubts -- you know, "Maybe I should really read up on investment strategies and become a much more active investor ... or maybe I should have trusted that financial advisor after all ..."

I'm in low-cost index funds primarily because of the guidance of this group (as well as reading suggested by it), and I appreciate it. Good to hear additional confirmation that this is the right path.