Investment Opportunities

[Brat]

Check out "Diamond NestEgg" on YouTube. Recently she compared Schwab, Fidelity and Vanguard's money market funds.

 

[Koolau]

Well, yes. Funds like this are evidence that the hucksters have long since arrived. The roots of "index investing" began in the 1970s, supported by data that showed (and a half century later, continues to show) that only a single-digit percentage of actively managed funds beat their benchmarks over investment-length holding periods, typically 5-10 years. The S&P SPIVA reports show this every six months. In this context the benchmarks are indexes containing very broad holdings. Over time, the market recognized this and now it is something like 60% indexed. Morningstar research has documented this in another way by periodically reporting that low fees (I.e., index funds) are the only reliable predictor of fund performance.

As investor funds leaked away from actively managed funds, the hucksters began donning sheeps' clothing and adding the word "index" to their narrowly focused fund names. Hence we got "CRSP US Mega Cap Growth Index" and similar subterfuges. One of my favorites is "Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index."

So now we have "real" index funds and a horde of fakes to winnow out. Ain't capitalism wunnerful?

Whatever these so-called index funds call themselves, they can't hide their fees. True index funds have very low fees. Just sayin'...

 

[Koolau]

Check out "Diamond NestEgg" on YouTube. Recently she compared Schwab, Fidelity and Vanguard's money market funds.

Would you care to share a preview before I go and look it up (or not)? Thanks.

 

[OldShooter]

Whatever these so-called index funds call themselves, they can't hide their fees. True index funds have very low fees. Just sayin'...

True enough. I think their goal is to snare people who have heard that index funds are the winning strategy but who really don't understand what is behind the concept. What the buyers end up with are relatively expensive sector funds and they believe they have done the right thing.

 

[Koolau]

True enough. I think their goal is to snare people who have heard that index funds are the winning strategy but who really don't understand what is behind the concept. What the buyers end up with are relatively expensive sector funds and they believe they have done the right thing.

That's kinda sad, though not too surprising I suppose. I have to admit that I wasn't very savvy in the ways of investing until I found this site (and Vanguard). Still far from guru status, but I have a basic understanding of some of the fundamentals (like cardinal rule of limiting fees!)

 

[TheWizard]

The categorization of different stocks as growth/value and as small/mid/large/mega capitalization has been around for many decades.
And index funds such as Small Cap Value have been around for a while also; they are not really "huckster" funds.

Sector index funds are probably newer and appeal to folks who think pharmaceuticals, for example, are a good investment but don't want to bet which companies will do best.

As for ERs, they aren't necessarily too bad; the ones I own:
VOO .03%
VGT .09%
MGK .07%
QQQ .20%
VXF .05%

Compare those to various Vanguard MANAGED mutual funds with ERs of .40% or more. (And Vanguard is likely lower ER than most managed funds.)

Regardless, if you don't think that tilting away from a Total Market Blend fund is going to outperform by at least 1-2% per year, then just stay with VTI...

 

[Qs Laptop]

The roots of "index investing" began in the 1970s, supported by data that showed (and a half century later, continues to show) that only a single-digit percentage of actively managed funds beat their benchmarks over investment-length holding periods, typically 5-10 years. The S&P SPIVA reports show this every six months. In this context the benchmarks are indexes containing very broad holdings.

Yet with barely breaking a sweat I can name four Fidelity funds that beat the index over 3 years, 5 years, or 10 years, or just about any 5 year or 10 year period with the endpoints of anybody's choice.

I presume the metric is total return and not merely "did the managed fund beat the index for X number of years in a row." Because it's likely that a managed fund might beat the index for "only" 4 out of the 5 years, or 7 out of the 10 years but if you look at the total return the managed fund comes out ahead over that time period.

 

[Koolau]

Yet with barely breaking a sweat I can name four Fidelity funds that beat the index over 3 years, 5 years, or 10 years, or just about any 5 year or 10 year period with the endpoints of anybody's choice.

I presume the metric is total return and not merely "did the managed fund beat the index for X number of years in a row." Because it's likely that a managed fund might beat the index for "only" 4 out of the 5 years, or 7 out of the 10 years but if you look at the total return the managed fund comes out ahead over that time period.

I'm sure you can find those funds but could you have picked them 5, 10 or more years ago. Hindsight is 20:20.

 

[Stormy Kromer]

Yet with barely breaking a sweat I can name four Fidelity funds that beat the index over 3 years, 5 years, or 10 years, or just about any 5 year or 10 year period with the endpoints of anybody's choice.

I presume the metric is total return and not merely "did the managed fund beat the index for X number of years in a row." Because it's likely that a managed fund might beat the index for "only" 4 out of the 5 years, or 7 out of the 10 years but if you look at the total return the managed fund comes out ahead over that time period.

Which funds are they?

 

[Qs Laptop]

I'm sure you can find those funds but could you have picked them 5, 10 or more years ago. Hindsight is 20:20.

Looking back at 5 and 10 year periods to show that most managed funds don't beat the index is also hindsight.

I did pick those Fidelity funds in February, 2018. That's 7 years ago. Total return beats the index over that time period.

Again, pick any 5 year period, I don't care, 2005 through 2010, right through the great recession and these Fidelity funds beat the S&P500 index (I used VOO for the comparison fund.) Or go from 2010 to 2015. Or 2012 to 2019. Pick your own endpoints.

 

[Qs Laptop]

Which funds are they?

FBGRX, FSPTX, FOCPX, FSELX for starters.

 

[Stormy Kromer]

FBGRX, FSPTX, FOCPX, FSELX for starters.

Thank you

 

[FREE866]

FBGRX, FSPTX, FOCPX, FSELX for starters.

Impressive results for those, but the benchmark for those funds is not the S and P 500. It would be the NASDAQ or a technology index no?. I don't have the software, but I'd like to see a comparison of them to that sector.

 

[Stormy Kromer]

FBGRX, FSPTX, FOCPX, FSELX for starters.

Thank you, please don't think I'm doubting you. I knew the S&P can be beat, I tried and failed on my own, then I had a FA invest my money telling me he regularly beat the P by 3-4% a year. He didn't.

After 20 some years of trying I settled on VG Total Stock Index. I'd have twice the nest egg I have today if I had done that from the start. I'm not going to lead the league in hitting every year, but Ill make the team.

My hat is off to investors like yourself who do the diligence and invest accordingly. I tried and couldn't. My FA promised and failed miserably, while charging me 1.5% AUM.

I'm in the VG Index and forget it camp. We're all in this together. Thanks for your insight and honest information.

 

[Qs Laptop]

Thank you, please don't think I'm doubting you. I knew the S&P can be beat, I tried and failed on my own, then I had a FA invest my money telling me he regularly beat the P by 3-4% a year. He didn't.

After 20 some years of trying I settled on VG Total Stock Index. I'd have twice the nest egg I have today if I had done that from the start. I'm not going to lead the league in hitting every year, but Ill make the team.

My hat is off to investors like yourself who do the diligence and invest accordingly. I tried and couldn't. My FA promised and failed miserably, while charging me 1.5% AUM.

I'm in the VG Index and forget it camp. We're all in this together. Thanks for your insight and honest information.

I've sold FSTPX and FOCPX along the way since I bought them in 2018. FOCPX holdings resembled FBGRX, and FSTPX was a lot like FSELX. They were in an IRA.

I own Fidelity FXAIX, their S&P500 index fund and I've got my wife's work 401k in an S&P500 index fund. I like broad market index funds. They are fine, especially if you are in the set it and forget it camp.

 

[Qs Laptop]

Impressive results for those, but the benchmark for those funds is not the S and P 500. It would be the NASDAQ or a technology index no?. I don't have the software, but I'd like to see a comparison of them to that sector.

I was responding (mostly) to OldShooter who brought up the S&P SPIVA reports and broad market index funds. That's why I compared those Fidelity funds to the S&P500 index.

The funds I listed are mostly US large cap funds with hundreds of stocks in them. I leave it to you to compare them to their "benchmarks", though I consider the S&P500 index to be the benchmark.

 

[FREE866]

The funds I listed are mostly US large cap funds with hundreds of stocks in them. I leave it to you to compare them to their "benchmarks", though I consider the S&P500 index to be the benchmark.

The funds you listed have 50-100% of their holdings in technology. The S and P is ~30% technology.
The S and P is not the benchmark. If we are going to discuss performance of funds you want to compare apples to apples. That's not an opinion; its just the way benchmarks work.

 

[Koolau]

Looking back at 5 and 10 year periods to show that most managed funds don't beat the index is also hindsight.

True, but that hindsight is instructive. IOW it strongly suggests that picking something better than the index is likely only luck. Where as looking back and seeing that a few funds happened to beat the index isn't instructive. There is nothing in that fact that anyone can use going forward to pick the next winners. We all know winners will be out there but we also know that someone will win the lottery eventually - just not what ticket will win.

 

[Qs Laptop]

True, but that hindsight is instructive. IOW it strongly suggests that picking something better than the index is likely only luck. Where as looking back and seeing that a few funds happened to beat the index isn't instructive. There is nothing in that fact that anyone can use going forward to pick the next winners. We all know winners will be out there but we also know that someone will win the lottery eventually - just not what ticket will win.

I show you 4 funds that beat the index in any given 5 year period over the past 25 years and your response is that if it beats the index for 2022 to 2026 that is pure luck.

I suppose the Kansas City Chiefs having a winning record this year was also luck?

 

[Koolau]

I show you 4 funds that beat the index in any given 5 year period over the past 25 years and your response is that if it beats the index for 2022 to 2026 that is pure luck.

I suppose the Kansas City Chiefs having a winning record this year was also luck?

Nope. It might not be pure luck that they beat the index. Maybe they do have some mojo woikin' for them. The LUCK is that someone actually PICKED them 5 years ago. (Looking back, it's easy to pick winners).

 

[Qs Laptop]

Nope. It might not be pure luck that they beat the index. Maybe they do have some mojo woikin' for them. The LUCK is that someone actually PICKED them 5 years ago. (Looking back, it's easy to pick winners).

Think whatever you want. The fact is that 5 years ago these funds were beating the index for any 5 year period over the past 20 years, no matter what endpoints you listed. And 6 years ago and 7 years ago and 8 years ago they were beating the index for any 5 year period over the past 20 years, no matter what endpoints you pick. That's one of the reasons I bought them.

Is it unreasonable to assume they will not beat the index in the next 5 years?

Why?

 

[TheWizard]

Q makes a good point.
Too much credence is given to the old saying "past performance doesn't predict future results".
It doesn't GUARANTEE future results, true.

But I believe that certain sectors will tend to outperform the S&P 500 on average, over time.

Still, those four Fidelity funds appear to be managed funds, with potential for large Capital Gains Distributions, which is not a good thing in a taxable account.

So I still prefer certain narrow index funds like VGT and MGK...

 

[OldShooter]

Is it unreasonable to assume they will not beat the index in the next 5 years?

You are talking about "persistence" here. It is intuitively very attractive to think that persistence exists, but anyone familiar with the last seventy-years or so of stock price research knows that it does not.

Why?

The short version is that prices are very nearly random, with only a slight upward drift. From about seventy years ago, inexpensive computer power became increasingly available, accompanied by better and better price databases. CRSP is now the gold standard I think. (CRSP Research Data Products - Center for Research in Security Prices) If prices are random, then the results of stock pickers are necessarily random as well, and there can be no confidence that any fund's performance will persist over the next five years. Here's a softball, based on one of the S&P Manager Persistence reports (they are all basically the same.)

At the left is a ranking of funds based on 5 years' performance. At the right is the ranking of the top 20% performers over the subsequent 5 years. (https://www.spglobal.com/spdji/en/spiva/article/persistence-scorecard-march-2019/)

OK, so some research:

Nobel laureate Harry Markowitz: "Portfolio Selection" 1952 : https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1952.tb01525.x This is the first paper towards what has been called "Modern Portfolio Theory. Modern Portfolio Theory is based on the observation that randomness is an excellent first approximation for stock price sequences.

Nobel laureate Michael Jensen's 1967 paper: The Performance of Mutual Funds in the Period 1945-1964 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance." (Note: the small number 115 of funds is probably due to the fact that there just weren't that many funds 60 years ago.)

Nobel laureate Eugene Fama and research partner Ken French: "Luck Versus Skill in the Cross Section of Mutual Fund Returns" :Luck Versus Skill in the Cross Section of Mutual Fund Returns Heavy sledding. For me anyway.

And some easier reading:

"A Random Walk Down Wall Street" by Burton Malkiel https://www.amazon.com/Random-Walk-Down-Wall-Street-dp-1324051132/dp/1324051132 (latest edition January 2023) This is the classic.

"Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Losers-Game-Strategies-Successful-dp-1264258461/dp/1264258461 (latest edition, May 2021)

Nassim Taleb is always a roller-coaster ride to read but the effort is worthwhile: "Fooled By Randomness)" https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219

 

[Qs Laptop]

Yes, I've seen your charts a couple times now. Doesn't do anything to refute the fact there are managed funds that consistently beat the index. Your appeal to authority is called a logical fallacy. I've got data that directly contradicts their assertions.

The stated premise "there can be no confidence that any fund's performance will persist over the next five years" is a strawman. That's not the issue here. The issue is: "are there funds whose total return beats the index over 5 years?" And the answer is yes.

Will the New York Yankees be competitive over the next 5 years? Will they beat the average Won-Loss record of the league? No one knows for sure, but, it's a pretty safe bet given their past history, their management, their roster, etc. Same thing with managed funds.

 

[OldShooter]

I think both people who are still following this thread have probably checked out now. Believe what you like. I assume you have taken very large positions in the funds you mention.