researching mutual funds

[CincyDave]

As far as active vs passive, my 401K is mostly index as we had very little active choices. My IRA with Fidelity has actively managed funds and has handily beat the total market. Attached chart compares the 4 funds in my Fido IRA vs Vanguard Total Market Fund. 3 of the Fido funds beat the total market and one trailed. In the aggregate they beat the total market by a wide margin. I did buy these funds a long time ago before indexing was so in vogue.
I actually enjoy fund and stock research, but understand a lot of people don’t which is one big appeal of the index funds, along with lower expense ratios. I do agree with post 18 from 24601NoMore that in the event of a mass exodus from the market, active fund managers may have an advantage.
Back to the OP’s questions, I currently use Morningstar for mutual fund research as others have mentioned.
The interactive chart lets you compare different funds’ performance over different time periods if you want to compare your funds’ performance to others. The style box shows whether the funds are growth, value or a blend and what size companies they invest in, so you can tell how diversified you are.

[Qs Laptop]

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Originally Posted by CSdot I am in the process of researching mutual funds for a SepIRA and I am experiencing analysis paralysis. Does anyone have a suggestion for a useful website that I can use to narrow options, and maybe where I can plug in what funds I already have so I can make sure I am diversified? Thanks.

Go to:

https://www.morningstar.com/

and type your mutual fund ticker symbol into the search box.

Then click on the Portfolio tab which will give you a view of the types of securities inside the fund. Scroll further down to Holdings and you will see the top 10 individual stocks inside the fund. Click on Show More Holdings and you will see the top 25 individual stocks inside the fund. By comparing the top 10 stocks in each fund and the percentage they make up of each fund you can see if there are duplication of stocks in your mutual funds.

At minimum you should have a large cap US fund, a small cap US fund, and a large cap International fund. Be sure to double check the stocks in the international funds because frequently they will have US stocks that have a large presence outside the US like Mastercard, Visa, Google, etc.

[Qs Laptop]

BTW, I am NOT an index fund investor. Here is my one year return as of January 4, 2021.

Returns vs Market 010421.jpg

[travelover]

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Originally Posted by Qs Laptop BTW, I am NOT an index fund investor. Here is my one year return as of January 4, 2021.

Do that ten years in a row and you'll have my attention. A stopped clock is right twice a day.

[RetiredAtThirty-eight]

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Originally Posted by OldShooter Not just unpopular, but mathematically incorrect. Nobel winner Dr. William Sharpe explains the simple arithmetic here: https://web.stanford.edu/~wfsharpe/a...ive/active.htm

I agree with the math presented there (I think). But it certainly doesn't say what you are implying in your comment above. The math presented speaks to each body of both active and passive funds. It doesn't speak to an individual fund manager's ability to out-perform the indexes. It only says the entire body of active funds cannot outperform the entire body of passive funds. And yet we know most active funds substantially under-perform the indexes they use as a benchmark. The math you presented proves that some active managers must outperform the indexes. It doesn't hurt that this is observed in the actually body of actively managed funds that actually exist.

Also, my comment that you addressed here said that index funds would likely underperform expectations over the next 20 years. The math presented doesn't even speak to expected future returns. It ignores expectations completely. So it can't say what you think it says.

You have miss-applied this same mathematical proof in a previous post in a similar incorrect manner and I corrected you at that time as well.

The lesson here is that mathematical proofs are a good thing but they only prove what they prove. It's improper to apply them to subjects they don't even address.

[RetiredAtThirty-eight]

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Originally Posted by OldShooter Not just unpopular, but mathematically incorrect. Nobel winner Dr. William Sharpe explains the simple arithmetic here: https://web.stanford.edu/~wfsharpe/a...ive/active.htm Broad-based index funds will underperform to the extent of their costs: expense ratio + trading costs + market impact costs. The average of stock pickers will underperform by their much larger costs.

It's also worth pointing out that the "proof" you offer by Dr. Sharpe has certain assumptions that must be met for his proof to apply.

One of them is that the active managers only pick stocks from the components of the index in question. In the case of ARK Invest funds the manager selects numerous companies that are not in any index and this is the very basis of their stunning performance and the basis of my opinion that stock indexes like the S&P 500 will have disappointing performance.

As one example of this, ARK funds largest holding over the previous two years was TSLA. And yet TSLA was not included in the S&P 500 until last month. ARK hold numerous other stocks that the major indexes literally cannot buy because it's against their own rules for one reason or another.

In times of economic transition, like I expect us to witness over the next couple of decades, you want to own the companies that are driving the transition. Because they are they ones growing the most value, most quickly. Because their share prices will reflect this (as we have most recently seen with TSLA), if they are not in the Indexes, the Indexes will under-perform.

[Out-to-Lunch]

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Originally Posted by RetiredAtThirty-eight And yet we know most active funds substantially under-perform the indexes they use as a benchmark. The math you presented proves that some active managers must outperform the indexes.

But it follows, as night follows day, that lots of active managers must underperform the indexes. How are we to know in advance which are which?

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Also, my comment that you addressed here said that index funds would likely underperform expectations over the next 20 years. The math presented doesn't even speak to expected future returns. It ignores expectations completely. So it can't say what you think it says.

I must say I was very confused in your earlier posts about indexes underperforming expecations. Is that just a strawman? What "expectations" are you referring to? Are you somehow implying that actively managed funds will outperform "expectations"?

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Originally Posted by RetiredAtThirty-eight As one example of this, ARK funds largest holding over the previous two years was TSLA. And yet TSLA was not included in the S&P 500 until last month. ARK hold numerous other stocks that the major indexes literally cannot buy because it's against their own rules for one reason or another.

Are you claiming that TSLA was not in the Total Market index? The S&P 500 is a sector index of large-cap funds. It is a large fraction of the total market, but please don't equate "S&P 500" with "major indexes."

[Qs Laptop]

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Originally Posted by travelover Do that ten years in a row and you'll have my attention. A stopped clock is right twice a day.

Well, I have done it for probably 9 out of the past 10 years, I'd even say 10 out of the past 12 years. Look up the returns for FBGRX, CPOAX, WAMCX, FKDNX (there are others), but these are my main drivers for mutual funds.

It doesn't have to be done 10 years in a row, just the majority of those years. This past year alone will likely guarantee I'll never end up with a net loss vs. the indexes for the rest of my life. This year I did benefit from buying NIO and ROKU last March as well as buying TDOC a couple years ago before it exploded.

But I know this board loves index funds and I suspect I will be told I was lucky and it can't be sustained. Well, I've got my own record of backtesting and it involved real money.

[Qs Laptop]

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Originally Posted by RetiredAtThirty-eight It doesn't speak to an individual fund manager's ability to out-perform the indexes. It only says the entire body of active funds cannot outperform the entire body of passive funds. And yet we know most active funds substantially under-perform the indexes they use as a benchmark. The math you presented proves that some active managers must outperform the indexes. It doesn't hurt that this is observed in the actually body of actively managed funds that actually exist.

A good analogy is that most baseball pitchers throw a fastball at about 92-94 mph, therefore if you got a guy that throws 93 you should be happy with that. But there are many, many pitchers that throw 96-98, and some even throw 99 or over 100 mph. Find those guys and you will exceed expectations.

[RetiredAtThirty-eight]

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Originally Posted by Out-to-Lunch But it follows, as night follows day, that lots of active managers must underperform the indexes. How are we to know in advance which are which?

Ummm...that's what the title of this thread is about. There would be no point in researching funds if it were futile. My earlier posts on this subject explain my thinking on why I think ARK Invest funds focusing on disruptive technologies will out-perform over the next decade or two.

In case it wasn't clear, I think the most popular index for buyers of index funds, the S&P 500, has a lot of companies that will be negatively impacted by the disruption that is coming. Now, more than ever, it's important to be in funds that consider the way the world is changing rapidly based on these disruptive technologies. Sure, some of the biggest beneficiaries are already in the S&P 500 but many are too small or not yet profitable enough to be included. These are the companies that will have out-sized growth and take business away from established players.

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I must say I was very confused in your earlier posts about indexes underperforming expecations. Is that just a strawman? What "expectations" are you referring to? Are you somehow implying that actively managed funds will outperform "expectations"?

I continue to believe many or most actively managed funds will underperform the S&P 500 Index because they are managed by financial types with MBA's who don't understand the disruptive technologies that will be hitting the market in a big way over the next decade.

A fund family like ARK Invest specializes in these disruptive technologies and has analysts with expertise in each and every one of the disruptive technologies they cover. These analysts actually visit many of these small companies that are doing the ground-breaking research that will lead to big business opportunities. These specialized analysts can actually understand, for example, the science going on behind the genomics companies and appraise it in terms of whether it's almost ready for prime time. They are familiar with how costs of gene sequencing are dropping and a myriad of other details around the science so they can better analyze risks and potential profits.

To an analyst with an MBA but not any science background, this research just looks like mumbo jumbo. Since they can't make heads or tails of it, they can't buy a company like this until the product hits the market and starts generating revenue and profits. So, ARK gets in before the MBA types realize how much the technology is worth and start bidding the price up. That's what will provide the out-sized returns.

It's actual a travesty that brokerages and funds use MBA types that don't have a clue. And we wonder why the typical actively managed fund performs so poorly? Sure, some of it is due to expenses but it just makes common sense to have actual experts in the subject matter appraise it for risks, rewards and when it will be ready for prime time in the market. An MBA can't hope to do that without understanding the basics behind the technology.

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Are you claiming that TSLA was not in the Total Market index? The S&P 500 is a sector index of large-cap funds. It is a large fraction of the total market, but please don't equate "S&P 500" with "major indexes."

Nope. I must have misspoke. But the S&P 500 is the most widely used benchmark in the US and has a long history of regularly out-performing the total market index.

[OldShooter]

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Originally Posted by RetiredAtThirty-eight . .. The math you presented proves that some active managers must outperform the indexes. It doesn't hurt that this is observed in the actually body of actively managed funds that actually exist.

Of course. No argument there and it is certainly not a "gotcha."

The problem for investors is that the performance of actively managed funds is almost completely random. In one year, about 1/3 or a little more of active funds will beat their benchmarks. Each year cumulatively, however, the number of winners declines. By the time you get out to ten years, a tiny fraction of funds are still ahead of the game. That's what randomness does for you. The thing it unfortunetely doesn't do for you is to give you any way to identify the winners ahead of time.

Of course with your wisdom you can identify those winners. From your posts you have made that clear while routinely insulting anyone who questions your wisdom. You refused to read the link I gave you on Keynes' beauty contest. Here is another link that you will probably choose to ignore as well: The Dunning - Kruger effect: https://en.wikipedia.org/wiki/Dunnin...3Kruger_effect

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Originally Posted by RetiredAtThirty-eight Also, my comment that you addressed here said that index funds would likely underperform expectations over the next 20 years. The math presented doesn't even speak to expected future returns. It ignores expectations completely. So it can't say what you think it says.

In a lifetime of science and engineering I have never seen an equation that has a time limit. 2+2=4 was true yesterday, it is true today, and it will be true in the future. Same story with Dr. Sharpe's calculations.

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Originally Posted by RetiredAtThirty-eight You have miss-applied this same mathematical proof in a previous post in a similar incorrect manner and I corrected you at that time as well. The lesson here is that mathematical proofs are a good thing but they only prove what they prove. It's improper to apply them to subjects they don't even address.

Just out of curiosity, what is your educational and business experience?

[ILikeStarTrek]

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Originally Posted by RetiredAtThirty-eight I agree with the math presented there (I think). But it certainly doesn't say what you are implying in your comment above. The math presented speaks to each body of both active and passive funds. It doesn't speak to an individual fund manager's ability to out-perform the indexes. It only says the entire body of active funds cannot outperform the entire body of passive funds. And yet we know most active funds substantially under-perform the indexes they use as a benchmark. The math you presented proves that some active managers must outperform the indexes. It doesn't hurt that this is observed in the actually body of actively managed funds that actually exist. Also, my comment that you addressed here said that index funds would likely underperform expectations over the next 20 years. The math presented doesn't even speak to expected future returns. It ignores expectations completely. So it can't say what you think it says. You have miss-applied this same mathematical proof in a previous post in a similar incorrect manner and I corrected you at that time as well. The lesson here is that mathematical proofs are a good thing but they only prove what they prove. It's improper to apply them to subjects they don't even address.

I agree with you that OldShooter's web link doesn't address much about the active vs passive debate. To go a bit further than you did:

Early on, the discussion there gives a definition of active vs passive. Here's the active definition:

"An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently -- hence the term "active." "

By this definition - for example, any company employee who receives stock shares in an ESPP is an "active investor" and an "active manager" because they aren't investing in the entire stock market in a passive way. But investors such as this are clearly not professional mutual fund managers. So the analysis on this page doesn't address the situation of professionally-managed active mutual funds specifically but rather all active stock investments generically.

Towards the end, the web page actually acknowledges that there can be active managers that beat the index.

" It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question. It is also possible for an investor (such as a pension fund) to choose a set of active managers that, collectively, provides a total return better than that of a passive alternative, even after costs. Not all the managers in the set have to beat their passive counterparts, only those managing a majority of the investor's actively managed funds."

So this web page provides little (if anything) to settle the debate about professionally managed active vs passive mutual funds.

[MRG]

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Originally Posted by ILikeStarTrek I agree with you that OldShooter's web link doesn't address much about the active vs passive debate. To go a bit further than you did: Early on, the discussion there gives a definition of active vs passive. Here's the active definition: "An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently -- hence the term "active." " By this definition - for example, any company employee who receives stock shares in an ESPP is an "active investor" and an "active manager" because they aren't investing in the entire stock market in a passive way. But investors such as this are clearly not professional mutual fund managers. So the analysis on this page doesn't address the situation of professionally-managed active mutual funds specifically but rather all active stock investments generically. Towards the end, the web page actually acknowledges that there can be active managers that beat the index. " It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question. It is also possible for an investor (such as a pension fund) to choose a set of active managers that, collectively, provides a total return better than that of a passive alternative, even after costs. Not all the managers in the set have to beat their passive counterparts, only those managing a majority of the investor's actively managed funds." So this web page provides little (if anything) to settle the debate about professionally managed active vs passive mutual funds.

The portion I bolded is a big deal. I was issued a bunch of Megacorp stock that barely moved for many years. Additionally in other active investments provided by Megacorp were also overweight that equity. So that(not my investments) certainly twists something related to the active performance.

I don't have a dog in this fight, I do things my way. I do question posts that ask about someone's educational level and business acumen. Whatever.

[OldShooter]

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Originally Posted by ILikeStarTrek ... So this web page provides little (if anything) to settle the debate about professionally managed active vs passive mutual funds.

Well, it does show why actively managed funds will on average underperform passively managed funds by the amount of the cost difference. Implicitly it does say that a large fraction (but not a majority) will outperform. I linked to it because @RetiredAtThirty-eight predicted that passive funds will underperform some time in the future, which is not possible.

The active/passive investment debate really needs more information from other places and there is ample information available. The most accessible is probably the 20 years of semiannual S&P SPIVA reports, which consistently document the average underperformance of active managers. From report to report the percentage numbers jitter a little bit but basically they are all the same. Here is a chart I have posted before:

[Montecfo]

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Originally Posted by MRG I don't have a dog in this fight, I do things my way. I do question posts that ask about someone's educational level and business acumen. Whatever.

Yes. That usually signals that rhe person making the claim is unable to debate on the merits.

But of course none of this pointless religious discussion is helping the OP. It is a massive thread hijack which occurs anytime active management is discussed.

[ILikeStarTrek]

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Originally Posted by OldShooter Well, it does show why actively managed funds will on average underperform passively managed funds by the amount of the cost difference. Implicitly it does say that a large fraction (but not a majority) will outperform.

No, the page doesn't show that. Because to repeat what I said in my last post, the page isn't even comparing actively managed mutual funds to passively managed mutual funds. Rather, it's comparing active investors to passive investors. Like I said before, active investors include many investments other than active mutual funds, such as ESPP investments in a single stock.

To your point in general, any mutual fund that has higher expenses will need to perform better to offset those expenses (or else have worse overall performance when expenses are included), but one doesn't need a sophisticated analysis to know that.

[RetiredAtThirty-eight]

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Originally Posted by Montecfo Yes. That usually signals that rhe person making the claim is unable to debate on the merits. But of course none of this pointless religious discussion is helping the OP. It is a massive thread hijack which occurs anytime active management is discussed.

Agreed on both points.

Stepping back to look at the big picture, people that believe it's futile to pick an actively managed fund (or, heaven forbid, individual stocks) are essentially throwing their hands up in the air and saying it's futile to invest in anything other than broad based market indexes. It's the viewpoint of one who feels mostly helpless as an investor. Personally, I believe one can achieve better than average returns by applying knowledge about funds and companies and the economic climate to ones selection of funds and stocks. It's not futile. People beat the mean all the time and some do it a lot more than others. That's why we strive to be better investors.

Note to OldShooter: That is not an insult, it's an observation. I haven't insulted anyone on this thread but perhaps you hope to shut the thread down by claiming I'm insulting people. This thread is about helping others understand the range of investment options available to them in the fund space. Please stick to the topic.

[OldShooter]

I give up. I think it's pretty clear but am not interested in debating nits.

[NoiseBoy]

For the OP, if you're still hanging in here, I think the first question to try and answer is whether or not you want to create your own portfolio of mutual funds and rebalance them as required, or pick an asset allocation strategy such as 60/40, and then choose a single fund that will put your portfolio on autopilot? If you're interested in the second approach, take a look at Vanguard's STAR fund. It is comprised of 10 holdings, all of which are other VG funds, and maintains a 60% equity to 40% bond ratio. It's expense ratio of 0.31% is a touch high, but it has a long track record that you can review. Good luck and don't over think your initial deployment. Since your money will be in a tax advantaged account, you can tinker with it later.

[MichaelB]

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Originally Posted by Montecfo Yes. That usually signals that rhe person making the claim is unable to debate on the merits. But of course none of this pointless religious discussion is helping the OP. It is a massive thread hijack which occurs anytime active management is discussed.

I agree with both points. It’s difficult to deal with thread hijacks, those interested in discussing the original thread topic should push back (politely) and ask hijackers to sponsor and engage in their own thread.