Index Fund Investors Behave More Sensibly

[mathjak107]

Managed funds charge more management fees vs. index funds. Index funds by definition match (or lag by 0.10%) the index.

In aggregate, this means that managed funds have to underperform the index by value. This isn't lab indexing, it's unescapable math. If you add the behavorial advantage from the article (supposedly 3%), the difference only expands.

How do you square that?



That certainly is a big difference (in a good way for you )!

Nevertheless, "anecdote is not data", to use a silly expression. None of us (I think) are saying there aren't actively managed funds that do not outperform (Berkshire and plenty of other value funds, Wellington is also used often as an example) consistently.

What we are saying is that the odds are firmly against you if one selects an actively managed fund instead of a passive index one. In addition, the expertise required to select a good fund for the long term is beyond most people's capabilities (including mine for sure).

In addition, there seems to (again, according to the article) a behavorial bias when using index funds. In which way the causality runs ('stable' investors select indexes, or indexes promote 'stable behavior') I don't know, but it's there apparently.

I suspect it's 'stable' investors => more indexing though, so it's not an inherent advantage to indexes. Just a hunch though, also driven by the fact that very few sales people actively push indexes as of yet. So people buying them tend to know what they are doing.

actually ,again not true . you have expensive index funds today sold by advisors and the odds of picking a good performing managed fund is very high if you follow the money.

once you follow where investors are actually putting their money which is not in to thousands of little funds that go from top to bottom odds are pretty good you will out perform.

 

[Mulligan]

actually ,again not true . you have expensive index funds today sold by advisors and the odds of picking a good performing managed fund is very high if you follow the money.

once you follow where investors are actually putting their money which is not in to thousands of little funds that go from top to bottom odds are pretty good you will out perform.

Would it be fair to assume if you were involved with that kind of advisor who would sell you expensive index funds your only other option through them would also being sold expensive loaded managed funds with worse expense ratios?
I will not contest the fact you can beat the market with managed funds. But it certainly appears to be difficult. Almost every study I have read states the funds that do beat the indexes over rolling periods are in flux and change often.
But the most important reason I have index funds is I know I will get near market averages. So in turn, this money is so boring to me, I never even bother to look at its value and have no desire to buy or sell them. Now, my individual purchases... A whole separate matter.


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[Chuckanut]

Found this one in MarketWatch... is it the same article? Given the title is the same and the date I would suspect so.

Are index-fund investors smarter? - MarketWatch

Same author.

 

[mathjak107]

Would it be fair to assume if you were involved with that kind of advisor who would sell you expensive index funds your only other option through them would also being sold expensive loaded managed funds with worse expense ratios?
I will not contest the fact you can beat the market with managed funds. But it certainly appears to be difficult. Almost every study I have read states the funds that do beat the indexes over rolling periods are in flux and change often.
But the most important reason I have index funds is I know I will get near market averages. So in turn, this money is so boring to me, I never even bother to look at its value and have no desire to buy or sell them. Now, my individual purchases... A whole separate matter.


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the problem is that while that old saying that 80% of funds fail to beat their indexes is true , it t is not true when you say indexing beats 80% of investors.

investors tend to flock around a certain core of long term performers that do continue to deliver good performance over the long haul.

there are really not all that many funds that have the bulk of that investor money. I would think the old 80/20 rule may apply . 20% of all those managed funds may have 80% of investor money.

that is why I say that there is a difference between beating funds vs beating investors.

 

[Totoro]

there are really not all that many funds that have the bulk of that investor money. I would think the old 80/20 rule may apply . 20% of all those managed funds may have 80% of investor money.

If it were true that those funds outperform the market, 80% of money outperforms the average, which by definition cannot be true.

Only half of the money can outperform the average, and in practice much less because of management fees.

[Edit] Found some statistics: http://d3n8a8pro7vhmx.cloudfront.ne...n_Hedge_Fund_Performance__2009.pdf?1404994034

Smaller and younger funds typically outperform larger and older funds.

And another specifically about hedge funds: http://allaboutalpha.com/blog/2013/...-of-nearly-3000-equity-longshort-hedge-funds/

 

[MRG]

I interpreted it differently. IMHO index investors tend to follow a methodology. Give Bogle or whomever credit. Some followers of active managed funds do also. Mathjak107 gives an excellent example.

However either camp has a subset of investors that lets their emotions become a methodology. The emotional methodology always under performs. Perhaps a higher percentage of active fund investors get emotional. That's just MHO.

 

[mathjak107]

but from the Morningstar investor returns you can see both sides get emotional about the same

 

[samclem]

but from the Morningstar investor returns you can see both sides get emotional about the same

They don't "get emotional about the same": Investors in actively managed funds lose about 60% more than those in index funds due to their attempts to time the market. The difference results in an additional performance lag for active fund investors of .08% per month. That is not small change.

And this will be more productive if you'll stick with one line of reasoning. Either you believe that "dollar-weighted vs. overall fund performance" is a useful metric or you don't. From the above comment and numerous postings of similar info from Fido, it appears that you agree that this is a good way of knowing how closely investors are tracking the performance of the funds.
But you also wrote this:

you are missing the point . you can't really say index investors are any smarter since result are so individualized .

there is nooooo way to equate what a posted funds return has to the investors returns in those funds as a group. that is just as true in managed funds as well.

And, for what is worth, investors in managed funds have larger a larger lag in performance than do investors in index funds. (see the study linked at this post). That is, the investors in active funds underperform those funds to a greater extent than investors in index funds underperform the overall results of index funds. Add this to the additional performance lag of the managed funds themselves (caused by their costs and other things), and there's just no data-based argument that investors in managed funds, as a whole, do better (or are "smarter," I guess) than those in index funds. Quite the opposite.

 

[mathjak107]

nah! you would not be correct. those that drink the koolaid would like it to really be that way outside the lab BUT IN REALITY , NAH! for all the reasons i said.