"Winning Lazy Portfolios Using Fidelity Funds

[TickTock]

Vanguard is showing 5.06% as of 1/31/08 I think to compare fairly you must use Vanguard if possible since the S&P index will have no fees whatsoever

True. Vanguard 500 Index vs. S&P500 for the last 20 years:

VFINX: Basic Chart for VANGUARD INDEX TRUST 500 INDEX - Yahoo! Finance

 

[ERD50]

How on earth did we get from TA for picking stocks to AF versus indexes for investing?

Oh well. Carry on.

I think it went something like this - if TA works, smart mutual fund managers must be using it, so show us that funds that use TA can consistently beat an index on a risk-adjusted basis.

Need to eliminate survivorship bias. Need to adjust for any fees not included in the performance numbers. Need enough data for it to be statistically significant, not just a lucky monkey.

It's not an easy task. And like clifp says, it takes a big leap of faith to pay 5.75% upfront. Someone like me might think that the day I turn over 5.75% is the day that TA stops working (if it ever did work).

Not an easy sell.


-ERD50

 

[ESRBob]

Amen! Now, over say, 20 years, it amortises out to a small number, but periodic rebalancing would put a heavy dent into returns.

Amen! I like DFA's tightly focused AA funds, but believe the extra costs of buying them erase the gains...

There are a few advisors who'll get you access to DFA funds for a fee-only 2k or even less per year, for portfolios up to several million. Cardiff Park, Evanson Asset Mgmt and Malvern Capital. So fees are not always that nasty .5%-1%. These same folks will get you access to institutional funds from people like PIMCO which have lower fees, too. So that can sometimes help justify the annual fee. 2k on a million dollar portfolio invested with DFA/Pimco is a .2% 'load' on that portion of the portfolio. Still not great, but not egregious, either.

 

[TickTock]

Hmmmmm.......

May be worth it.

 

[Marquette]

I think it went something like this - if TA works, smart mutual fund managers must be using it, so show us that funds that use TA can consistently beat an index on a risk-adjusted basis.

I'll buy that. The discussion then went to American Funds as, I assume, a good example of a mutual fund that consistently beats the market (once we can find a good chart or three at least). However, it was also pointed out that AF is a Value play. I don't know that much about TA, but I thought it was better suited to growth stocks. Does TA work well for value stocks?

 

[FinanceDude]

The problem I have with good fund families like American is the front end load. I just can't past the upfront load.

Well, unfortunately that's the case. However, they give some healthy breakpoints once you get up to $100K or more. I have a fair number of clients that put $500,000 into them, so they pay a one-time load of 2% or $10,000. That still is NOT an insignificant amount of money, but IMO it beats doing their C shares, which does not charge an upfront load but adds about 1% of internal expenses which go on for 10 years. If there is a "good thing" about that, it's that AF has made the decision (the only company I know) to automatically switch those shares to F shares after 10 years, at which point they quit paying 12b-1's and the ER drops even more.

DFA is another good family but having to fork over .5-1% of my assets in year to an advisor, who may or man not know more about investing than I do, is none starter for me.

I have inquired about DFA, they really grill you and put you through the ringer to get "invited" to be in their program as a DFA "preferred advisor". Along with spending $3000 to be belittled at DFA headquarters, along with making a written commitment to HOW MUCH business you will do in DFA. I have heard from a couple advisors that DFA "suggests" you drop all your other fund companies and use them exclusively.............not sure how I feel about that..........

The biggest problem with active funds, is I think it requires three smart choices. First you have to be able to figure out who in advance is going to out perform the market in the future, than you have be the add expenses for active management, then you have to be smart enough to figure out when to get out.

I used to think that as an individual investor, and that still holds true. However, since I now manage a lot of money for others, I have changed my philosophy. I think we can all agree that while folks are ON THEIR WAY to financial independence, they would like to get there ASAP, and the RIGHT investment strategy can help accelerate the process. What I have found is that when people reach FI, the mindset changes somewhat. It may be different on this board, but I am talking my experience in general. They aren't as concerned with OUTPERFORMING as much as they are concerned with getting hurt in a bad market. So they go from a capital appreciation mindset to a capital preservation mindset. As such, they are not as performance minded as they once were.

The reason I use AF exclusively for my MF holdings is the following:

1)They are buy-and-hold investors, and love dividend paying stocks
2)They keep expenses low, and most funds have a minimum of 5 managers on it, so there's no "Hot" manager to chase
3)They have low turnover
4)They will underperform somewhat in screaming bull markets, but do extremely well in poor markets, and most of their funds run at a beta of .85-.90.
5)Their customer service is excellent for the client and advisor.

Over long periods of time, they approach the return of the index funds (I did NOT SAY BEAT), and most folks would "take that". I don't expect anyone on here to agree with that, but I think we need to remember the folks on this forum are in the top 1/10 of 1 percent of financial literate folks in the USA, and most other folks have no clue about investing, they count on "luck" to make things work..........

 

[FinanceDude]

Amen! Now, over say, 20 years, it amortises out to a small number, but periodic rebalancing would put a heavy dent into returns.

Why do you say that?

 

[FinanceDude]

I'll buy that. The discussion then went to American Funds as, I assume, a good example of a mutual fund that consistently beats the market (once we can find a good chart or three at least). However, it was also pointed out that AF is a Value play. I don't know that much about TA, but I thought it was better suited to growth stocks. Does TA work well for value stocks?

American bases their investing decisions heavily on fundamental analysis, although TA is also looked at. I met one of the fund managers of Washington Mutual a few years ago, and he told me he's waited up to 10 years to buy a stock at the "right price" based on his screening process............

 

[TickTock]

Why do you say that?

Buying, say, ten or twenty thousand of an AF fund on for a yearly rebalance at a load of 5.75%. Ouch.

Unless my understanding of their loads is incorrect, and once you get past the breakpoints for total $$$ in the fund, the loads go down? Or maybe it's total $$$ invested with AF? That would make a difference.

 

[FinanceDude]

Buying, say, ten or twenty thousand of an AF fund on for a yearly rebalance at a load of 5.75%. Ouch.

Unless my understanding of their loads is incorrect, and once you get past the breakpoints for total $$$ in the fund, the loads go down? Or maybe it's total $$$ invested with AF? That would make a difference.

You can use two ways to lower the load for ongoing purchases:

1)Rights of accumulation: You get credit for ALL AF holdings in ALL accounts you own, even if they are in your current 401K at work. For instance, if you have $100,000 in your 401K in American Funds, you would pay 3.5% not 5.75% if you did a Roth IRA contribution or bought some AF in a joint account.

2)Letter of Intent: Let's say you have $80,000 you want to invest. The next breakpoint is at $100,000, which lowers the "load" from 4% to 3.5%. If you sign a letter of intent, you have 13 months to add the additional $20,000, and you receive the lower 3.5% breakpoint on the $80,000 you put in today.

Once you are invested, rebalancing is viewed as an exchange of shares, and there is no cost (load) to do so. In addition, if you need to take money out of your American Funds, they have a 60-day window where you can reinvest without paying another load.

 

[TickTock]

Once you are invested, rebalancing is viewed as an exchange of shares, and there is no cost (load) to do so.

Ah. I did not realize that. Makes AF a lot more attractive for a long-term investor. Thanks.