Index Fund Investors Behave More Sensibly

[Chuckanut]

Here's an article that claims that index fund investors behave more sensibly. That is they are less likely to buy high and sell low, panic when the market heads down or chase yesterday's big winner. (At least that is how I interpret it. )

Are Index-Fund Investors Smarter? - Total Return - WSJ

Apparently, the article is behind a pay wall. Try googling "Are Index-Fund Investors Smarter?" and see if you can get in through the Google back door. Sometimes it works.

 

[Which Roger]

I can't read the article because it wants me to log in. Is it claiming indexers are smarter, or more sensible, or both? Among informed investors, I think the same temperament that makes one an indexer also leads to one staying the course. You are basically saying "the market is smarter than I am". Informed non-indexers tend to believe they can do better by actively managing their portfolio.

On the other hand, I'm guessing that among the uninformed, there are relatively few indexers, since they are the ones most likely to fall for sales pitches, and the salespeople disguised as investment advisors aren't pushing index funds.

 

[Chuckanut]

Sorry, I guess the article is behind a pay wall. Here is one quote:

But I suspect it is less about greater intelligence and more about greater conviction. When you buy an index fund, your only worry is the market’s performance. But when you buy an active fund, you have to worry about both the market’s direction and your fund’s performance relative to the market. That double uncertainty may make investors more jumpy—and thus more likely to buy and sell at the wrong time.

 

[audreyh1]

I don't spend time worrying about my fund managers. I notice that on M* a lot of folks do worry about their fund manager, or "keep an eye on them", or worry if they are "falling behind". If you are going to spend a lot of time second guessing your fund manager you might as well buy your own stocks.

 

[mathjak107]

overall most small investors still suck at it no matter how they do it.

 

[Midpack]

Or for those less interested in pandering maybe sensible investors buy index funds...

 

[mathjak107]

that would be a better blanket statement, there are index funds now sold by advisors with high fees as well as fund families that cater to 401k plans with index funds and they still have a large number of investors that do the wrong thing at the wrong time.

looking at the fidelity spartan total market index the fund did alot better than tracking the money of small investors did . sorry but they are not smarter than anyone else .

 

[M Paquette]

More sensible, smarter, or lazier... Whichever, it produces the better long term results compared to various active trading policies.

Me? I'm lazy. Index funds, and wide asset allocation bands checked once a year. This leaves more time to play with kittens and other such high priority activities.

 

[Mulligan]

More sensible, smarter, or lazier... Whichever, it produces the better long term results compared to various active trading policies.

Me? I'm lazy. Index funds, and wide asset allocation bands checked once a year. This leaves more time to play with kittens and other such high priority activities.

If there is one thing I can count on while watching CNBC is EVERY year the market expects will say "based on market conditions this year will be a "stock pickers" market and index funds will lag behind".


Sent from my iPad using Tapatalk

 

[steelyman]

If there is one thing I can count on while watching CNBC is EVERY year the market expects will say "based on market conditions this year will be a "stock pickers" market and index funds will lag behind".

Translation: "Keep watching so we can keep our jobs."

 

[Gumby]

I can't read the article because it wants me to log in.

Do this:

1. click on the link in the post above.
2. copy and paste the resulting url to a google search box and search
3. click on the first search result.

This works with many pay-walled articles.

 

[samclem]

overall most small investors still suck at it no matter how they do it.

looking at the fidelity spartan total market index the fund did alot better than tracking the money of small investors did . sorry but they are not smarter than anyone else .

"Smarter", "better", may be too much. But your examples don't indicate whether investors in index funds perform closer to the actual returns of those funds. I.e. are index fund investors as likely as active fund investors to lose ground due to attempting to time the market. The answer is, apparently, "index fund investors are less likely to demonstrate behaviors that cause them to have performance lower than the funds they hold."

From the article linked at the OP:

So how sensible were investors? With 10 categories and four time periods, we have 40 readings. In 29 of those readings, the dollar-weighted result for index funds was above the average total return for those funds. But with actively managed funds, there were only nine instances when the dollar-weighted return beat the category’s average total return.

The 10-year results were especially telling, because they include the 2007-09 bear market—a time when even veteran investors made panicky decisions. For six of the 10 categories, the 10-year dollar-weighted returns for index funds were better than the average total return for those funds. What about active funds? There wasn’t a single instance.

In the article, John Rekanthaller (of M*) credits two reasons:
- Investors in index funds do behave better
- When the market took a dive in 2007-2009, active fund investors got disenchanted with active funds and invested in index funds, so the dollar-weighted averages of index funds benefited due to the market climb since then.

 

[mathjak107]

according to what i see on the fidelity spartan total market index fund investor returns lagged the funds returns by just as much as any other funds managed or not.

every year shows the same thing.

--------------------------1-Year---- 3-Year---- 5-Year-----10-Year---15-Year
Investor Return %-- 13.82----- 16.14----- 14.31----- 5.62------- 4.87
Total Return %------ 13.94----- 17.87----- 16.30----- 8.40------- 5.06

 

[samclem]

Emphasis added:

according to what i see on the fidelity spartan total market index fund investor returns lagged the funds returns by just as much as any other funds managed or not.

"just as much as any other funds"? C'mon. It would take a lot of research and number-crunching to know that. I'm not saying you didn't look at every other fund and do an anlysis, but I'm saying your findings are in contrast to what researchers at Morningstar found, and to the the findings of this peer-reviewed paper from the Univ of Nebraska which reads in part:

We find a significant performance gap for both index and non-index funds, indicating that some index fund investors are timing their investments through these low-cost vehicles, though the gap is smaller at 0.05% per month, versus 0.13% for non-index funds. We also calculate separately the dollar-weighted returns on positive and negative net cash flows for each fund. We find that on average, poorly timed purchase decisions cost investors about 0.06% per month and poorly timed withdrawals cost investors approximately 0.15% per month. We demonstrate through simulation that our empirical results are consistent
with investor return-chasing behavior.

So, according to this research, index fund investors underperform their funds by 60% less than active fund investors (.06% per month compared to .15% per month).

 

[mathjak107]

there is no consistancy that proves anything other than most small investors suck at investing that i can find . look for yourself on morningstar . just click on the investor returns box .

you may find a fund or two that works out different but that would be the exception .

basically index fund or not investor returns are not getting what the funds get. whatever they are doing the funds have better returns than the money movement shows the bulk of shareholders are getting..

the more volatile the time frame the greater the diifference between fund return vs investor returns.

"A new study finds that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years—a period in which the S&P 500 stock index returned 11.1% annually. That means stock-fund investors underperformed the market by approximately 7.4 percentage points annually for three decades, according to Dalbar, a financial-research firm in Boston that has updated this oft-cited study each year since 1994."

http://blogs.wsj.com/moneybeat/2014/05/09/just-how-dumb-are-investors/

 

[mathjak107]

same story for vfinx. investors are no smarter as a group

--------------------------1-Year----3-Year-----5-Year----10-Year----15-Year

Investor Return %-- 15.14---- 17.30----- 15.02------ 5.42------- 2.09

Total Return % ------15.33---- 17.82------ 16.0------ 7.87------- 4.80

 

[samclem]

same story for vfinx. investors are no smarter as a group

there is no consistancy that proves anything other than most small investors suck at investing that i can find .

The assertion is that the behavior of index fund investors provides better returns than the behavior of active fund investors. The evidence bears that out--they lag the performance of their funds by considerably less than active-fund investors do. Can you find any evidence to the contrary?

Note: Nobody is saying that index fund investors beat the performance of their funds (through smart timing, etc). In fact, doing that would invalidate much of the rationale behind passive, index-based investing.

 

[mathjak107]

i still disagree.

index fund returns are straw returns in the scheme of things.

every investor has different buy in points that determine their compounding , they also have different ways of adding money , some lump sum , some dollar cost average , they have different rebalance points , different sell prices and different tax structure.

you even have index fund investors paying different expense ratio's.


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.

the real world is very different from a hypothetical return that few actually see.

what counts is your own exact numbers. but since you likely did not do equal investments in the same investments as managed funds there really is no comparison you can make.

 

[Totoro]

index fund returns are straw returns in the scheme of things.

I don't think so. It gives you a baseline.

To compare other funds with. To see what impact your own behavior has, for good or for bad.

what counts is your own exact numbers. but since you likely did not do equal investments in the same investments as managed funds there really is no comparison you can make.

Of course there is. For any given period a broad passively managed index will -- on average -- outperform an actively managed fund. That's why one should invest in them. There will always be some funds that outperform the index, and that is something one cannot predict upfront.

And if you want specific comparisons, just take two specific dates for two specific funds and compare the returns of the two funds. Doesn't matter if you invested in them or not (unless you throw billions in ..).

Or maybe I don't understand your point?

 

[mathjak107]

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

 

[Totoro]

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

Ah, ok.

According to the article dollar-weighted returns are roughly higher by 3% annually in passive funds.

That means an average investor in passive funds there is 'smarter' in the sense that they time inflows and outflows better, in addition to a presumably lower cost.

And as far as I can tell they analyzed retail investors.

So that means that, yes, index investors as a group are 'smarter'.

Individual returns always differ from each other by definition, but this analysis says that most individuals get better returns than those investing elsewhere by a rather large margin.

So, I still disagree.

 

[mathjak107]

not true . there are thousands of funds out there . most we never heard of and have very little investor money .

one year they are at the top and one year at the bottom.

but then you have the middle of the pack of managed funds that have very good long term records. those funds attract most of the investor money . those funds have more investor money than some countries are worth.

the majority of investor money will be found in these constant middle of the pack good performers . they tend to be the same funds , with the same long term good records , funds like fidelity growth co , contra , etc to name some i useed for decades .

while in the lab indexing may do better than managed funds that does not mean they do better than where investors actually put their money since i will bet more than 1/2 the funds out there have less than just a couple of the mega funds.

i liken it to living here in nyc. if i go to certain areas my chances of getting mugged are pretty high. but if i avoid those areas i do not even need to know the best areas . my odds of getting mugged drop big time just by avoiding the bad areas

so like i say there is nothing that shows index investors do any better.

in fact i have never indexed and have used the fidelity insight newsletter for 25 years. based on a 100k investment in 1987 we are at 2.2 million today. a total market fund is about 450k less .

we also did it with 10-15% less risk. the fidelity monitor had even a better record using nothing but plain old fidelity funds.

http://www.reuters.com/article/2014/01/28/funds-fidelity-investing-idUSL5N0L23P520140128

 

[mathjak107]

the debate about indexing vs managed funds reminds me of buying a car.

you got the savvy guy who goes in to the dealership , pounds the salesman down to the lowest price then works on the finance guy for the best terms.

then a few years later he is back trading the car in at wholesale prices and buys another.

in the mean time grandma buys a car , pays more , gets a higher rate and sells the car privately at a better price.

grandma wins.


these debates are foolish and prove nothing on an individual level because of all the variables.

it is great you had the smarts to index but it sucked you had the worst tax planning structure in place and gave it all back.

you really can't compare as it is your entire plan that counts in the end and there is no wy to really benchmark that.

comparing returns in a lab is almost silly when soon as you walk out the door so many other factors carry a heavy influence if not even a heavier influence on results. .

 

[Totoro]

while in the lab indexing may do better than managed funds that does not mean they do better than where investors actually put their money since i will bet more than 1/2 the funds out there have less than just a couple of the mega funds.

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?

in fact i have never indexed and have used the fidelity insight newsletter for 25 years. based on a 100k investment in 1987 we are at 2.2 million today. a total market fund is about 450k less .

we also did it with 10-15% less risk. the fidelity monitor had even a better record using nothing but plain old fidelity funds.

Fidelity beat benchmarks by $35 billion, but does anyone care? | Reuters

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.

 

[pb4uski]

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