Index funds vs aggressive growth funds

[Moleskin Moyer]

Had another chat with my friend. He kind of backed off his initial claims stating he got the market rebound mixed in with his contributions mixed in with his dividends/capital gains. He also said his holdings were in an asset management account.

His basis was he started with $130K in principal back in 2009, and now the total value is $243K. He contributes $1800 a year. So his math was ($243K-$130K)/7 years = $16142 a year in returns. Is this math correct?

 

[RunningBum]

Had another chat with my friend. He kind of backed off his initial claims stating he got the market rebound mixed in with his contributions mixed in with his dividends/capital gains. He also said his holdings were in an asset management account.

His basis was he started with $130K in principal back in 2009, and now the total value is $243K. He contributes $1800 a year. So his math was ($243K-$130K)/7 years = $16142 a year in returns. Is this math correct?

Of course not. Contributions are not returns. The Beardstown Ladies tried that trick. They did sell a lot of books until they were called out..

Bottom line, do whatever the heck you want. It's your money, not ours, nor your friend's. But since you asked us, a 6 year comparison vs 2 year is not at all valid.

 

[ERD50]

Got into a discussion with a friend about index funds versus aggressive growth funds. ... 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. ...

Had another chat with my friend. ...

His basis was he started with $130K in principal back in 2009, and now the total value is $243K. He contributes $1800 a year. So his math was ($243K-$130K)/7 years = $16142 a year in returns. Is this math correct?

His math is wrong, he isn't accounting for the added funds (and the growth of those funds over the investment time frame). But regardless, you now have enough information to officially tell your friend his investments SUCK. What's he thinking?

If you invested in SPY in 2009, even w/o the $1800/year additions, you would have blown him out of the water. Here's the math, and the references:

SPY Historical Prices | SPDR S&P 500 Stock - Yahoo! Finance

SPY Mar 13, 2009 $65.83 (adjusted close, accounts for reinvest of divs/distributions)
SPY Mar 14, 2016 $202.50

So... 202.50/65.83 = 3.0761051

$130,000 (original investment) times 3.0761051 = $399,893.66

Beats the cr@p out of his $243,000, even without $1,800 times 7 years, a not insignificant $12,600.

Now, be careful how you present this. You want to teach him something, not pi$$ him off.

But do let us know his reaction.

-ERD50

 

[samclem]

If you invested in SPY in 2009, even w/o the $1800/year additions, you would have blown him out of the water. Here's the math, and the references:

SPY Historical Prices | SPDR S&P 500 Stock - Yahoo! Finance

SPY Mar 13, 2009 $65.83 (adjusted close, accounts for reinvest of divs/distributions)
SPY Mar 14, 2016 $202.50

So... 202.50/65.83 = 3.0761051

$130,000 (original investment) times 3.0761051 = $399,893.66

Beats the cr@p out of his $243,000, even without $1,800 times 7 years, a not insignificant $12,600.

Now, let's be fair. You're only looking at the returns that the friend could have gotten. Maybe his friend isn't selfish--his decision to invest in those "special" funds provided income for his broker/advisor, the folks that work at the high expense funds, the folks that maintain their homes and cars, etc. Gotta "spread the money around" as they say. Sure, the friend could have had $150K more in his account right now, but let's think about the greater good.

 

[pb4uski]

...His basis was he started with $130K in principal back in 2009, and now the total value is $243K. He contributes $1800 a year. So his math was ($243K-$130K)/7 years = $16142 a year in returns. Is this math correct?

=RATE(7,-1800,-130000,243000) = 8.28% Not so hot.

Meanwhile, if he had just invested $130k in VFIAX on 3/14/2009 (about the bottom) and forgot about contributions and reinvested dividends his investment would be worth $402,756 today, a 17.5% annual return.

So he earned about 1/2 of what the "boring" index fund returned (albeit for an unusual period of time in that it was right into the rally from the great recession).

	BoY	8.28% Return	Contb	EoY
1	130,000	10,764	1,800	142,564
2	142,564	11,804	1,800	156,168
3	156,168	12,931	1,800	170,899
4	170,899	14,150	1,800	186,849
5	186,849	15,471	1,800	204,121
6	204,121	16,901	1,800	222,822
7	222,822	18,450	1,800	243,071

 

[hnzw_rui]

Some backtesting from Jan 2009:
https://www.portfoliovisualizer.com...0&reinvestDividends=true&annualPercentage=0.0

Even VSMGX with drag of 40% bonds and international equities did better.

Edit: Here's backtesting from Mar 2009 bottom.
https://www.portfoliovisualizer.com...3&reinvestDividends=true&initialAmount=130000

 

[pb4uski]

OP, when you share these results with him make sure to have a box of kleenex handy. He'll need it.

 

[samclem]

OP, when you share these results with him make sure to have a box of kleenex handy. He'll need it.

Offer to go with him when he visits his "advisor." Thank goodness he spent the money to get professional advice.

 

[hnzw_rui]

Offer to go with him when he visits his "advisor." Thank goodness he spent the money to get professional advice.

Personally, I wouldn't meddle. His money, his decision. Wouldn't want to get blamed if his portfolio goes down due to temporary market volatility. Only thing I'd do is give a copy of William Bernstein's "If You Can". If people still decide to pay for loads and AUM to their FA after reading it, then that's their choice.

 

[Totoro]

Well, it does seem friend has an open mind with going back and correcting his numbers.

So the conversation might turn around after all.

Who knows, said friend might end up here thanking us

 

[Moleskin Moyer]

Thanks for the input, everybody. I own VTSAX, VTSMX, VEXRX, VTIAX, VGSLX. I learned a lot from the math examples. Thank you very much! I will apply that to my numbers and see the result.

As for my friend, I will give him the bad news, but the math is the strong supporting evidence and will really change his mind. He admitted to paying sky-high expense ratios. On top of that he's paying a 1% annual asset management fee. He thought it was worth it. I always knew that it wasn't but didn't understand the math behind forming a convincing argument until now.

 

[jazz4cash]

I think we are still curious to know what specific investments the FA has sold to your friend. After all if they are plain ol mutual funds, the FA isn't bringing any value. An FA needs to offer something exotic and I bet your friend doesn't even know what he has. I agree it may be a sensitive issue and he or FA may reject the math.


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[DrRoy]

Non index will do better some of the time. Over many years the higher fees, turnover, and higher volatility will work against you. I have tried lots of things over 35 years and I am nearly all index now.

 

[Moleskin Moyer]

My friend gave me a listing of his funds. They are in this portfolio labeled AMS funds. This listing is long:

1) Fidelity Advisor New Insights Fund Class I 1604
2) Oakmark International Small-Cap Fund 8509
3) My Asset Strategy Fund Class I 1864
4) Loomis Sayles Bond Fund Institutional Class 5840
5) Metropolitan West Total Return Bond Fund Class I 5509
6) Franklin Mutual Global Discovery Fund Class Z 0404
7) PIMCO Total Return Fund Class P M552
8) Principal Diversified Real Asset Fund Class P L886
9) Royce Total Return Fund Investment Class 5881
10) Scout Unconstrained Bond Fund Class I
11) Templeton Global Bond Fund Advisor Class
12) AMG Yacktman Fund Service Class
13) FPA Crescent Portfolio
14) Fidelity Advisor Mid Cap II Fund Class I
15) Fidelity Spartan 500 Index Fund Investor Class

Those are the funds. There are also direct holdings in commodities, stocks, and metals that he didn't list.

 

[pb4uski]

Way too complicated for me. I'm guessing that he has more tickers than I have had in my lifetime. Has he ever used M*'s Instant X-Ray tool to assess his portfolio?

 

[jazz4cash]

WOW! That's a lot of funds!


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[samclem]

Has he ever used M*'s Instant X-Ray tool to assess his portfolio?

"No, I have a guy who handles all that for me. No, I don't want to read a book about this stuff." Trust and outsourcing can be very expensive.

 

[Moleskin Moyer]

Way too complicated for me. I'm guessing that he has more tickers than I have had in my lifetime. Has he ever used M*'s Instant X-Ray tool to assess his portfolio?

Where can I find that?

 

[mystang52]

I didn't look up each of those friend's funds, but with that many there just has to be significant overlap/duplication, above and beyond additional loads and fees.

 

[samclem]

Where can I find that [Morningstar X-Ray]?

Here's a link to "Instant X-Ray", which is free and doesn't require an enrollment into Morningstar: Instant X-Ray

It asks for the ticker symbols for each holding (a 5 character alphabetical code. E.g. The one for Oakmark International Small-Cap Fund 8509 is O A K E X). If he doesn't have them, he can find them by entering the fund name in the search area of the Morningstar main page (Morningstar – Independent Investment Research), or just using Google.

Without a dollar value or percent of total portfolio for each fund, it's not possible to do an analysis of the portfolio (his total expenses, the degree of overlap of his various funds, how his portfolio is weighted (to large/small, growth/value, Domestic/International, stocks/bonds, etc)).

If he gets serious about this, it's well worth the few dollars to sign up with Morningstar and have access to the Premium tools and the reports from their analysts. I think it's about $25 per month, and there's a 14 day free trial period. He could quit after 1 month if he gets the answer he needs--that would be an incredible bargain compared to what he's paying now.

 

[LOL!]

The list of funds shows that the portfolio cannot be 100% equities, but has some bond funds in it as well. Therefore, the return of this portfolio is very unlikely to have outperformed the S&P500 index fund. In other words, the portfolio cannot be an "aggressive growth" portfolio.

A better comparison would be to a Vanguard Target Retirement or LifeStrategy fund of index funds with about the same ratio of stocks:bonds as this portfolio.

The M* Instant X-ray would show the ratio of stocks:bonds for this set of funds as long as one put in the dollar amounts of each of the funds. Of course, even better would be to put in the transactions over the years, but that's not going to happen.

In any event, a truly valid comparison would get complicated fast and would be unlikely to convince a non-believer in switching to a low-cost passively-managed portfolio of index funds.

Then add to all that, tax efficiency if any of these funds are held in a taxable account. Taxes can be an additional cost that is quite stealthy since one rarely pays the taxes by cashing in fund shares.

And one more thing: Since this portfolio appears to be held at Fidelity, the Fidelity "Analysis" tab will run something they call "Guided Portfolio Summary" which is the same thing as the Morningstar X-ray analysis. Fidelity clients should not have to type anything in and just click a few buttons to get the analysis.

 

[Moleskin Moyer]

=RATE(7,-1800,-130000,243000) = 8.28% Not so hot.

I used pb4uski's example to run my numbers and my friend's. You guys can troubleshoot me.

For simplicity's sake I assumed my friend had all equities and no direct holdings or bonds. The time period is January 1, 2009 through December 31, 2015. A period of six years. In that time period I contributed on average $1192 a month into my taxable accounts. I averaged my numbers because my contributions fluctuated with my finances and the availability of funds. On January 1, 2009 I started with $128,574. On December 31, 2015 I had $513,458. I contributed $14,304 annually in that time period.

For my friend I assumed the same time period based on his input. A period of six years, and he contributed $1200 annually. He started with $130,000 on January 1, 2009. On December 31, 2015 he had $243,000.

Rates of return:

Mine: =RATE(6,-14304,-128574,513458) = 19% rate of return
Friend's: =RATE(6,-1200,-130000,243000) = 10% rate of return

 

[LOL!]

You might take a look at portfoliovisualizer.com which allows one to backtest a portfolio with monthly (or other) contributions. That would seem to be more fair than what you have done.

For one thing, you cannot compare a portfolio with bond funds to an all-equity portfolio unless you want to reach the conclusion that equities outperform bonds over the long term.

 

[ERD50]

...

For one thing, you cannot compare a portfolio with bond funds to an all-equity portfolio unless you want to reach the conclusion that equities outperform bonds over the long term.

I will gently disagree with this. It is true in fully analytical terms, but if I'm willing to go 100% equities, and accept the volatility, then I can take the view that it is 'fair' to compare that portfolio to my friend's portfolio, and make an informed choice.

But probably more conventional to find out what AA the friend and his FA agreed on (if that was even done), and then match that with the same blend of total bond, total market passive index funds. That should be pretty easy to do.

-ERD50

 

[pb4uski]

I used pb4uski's example to run my numbers and my friend's. You guys can troubleshoot me.

For simplicity's sake I assumed my friend had all equities and no direct holdings or bonds. The time period is January 1, 2009 through December 31, 2015. A period of six years. In that time period I contributed on average $1192 a month into my taxable accounts. I averaged my numbers because my contributions fluctuated with my finances and the availability of funds. On January 1, 2009 I started with $128,574. On December 31, 2015 I had $513,458. I contributed $14,304 annually in that time period.

For my friend I assumed the same time period based on his input. A period of six years, and he contributed $1200 annually. He started with $130,000 on January 1, 2009. On December 31, 2015 he had $243,000.

Rates of return:

Mine: =RATE(6,-14304,-128574,513458) = 19% rate of return
Friend's: =RATE(6,-1200,-130000,243000) = 10% rate of return

Only problem that you have is that January 1, 2009 to December 31, 2015 is 7 years, not 6 years.

Assuming those are the right dates, then the returns are 15.5% and 8.6% for you and your friend, respectively.