So, Chronos, where is your money invested and how well are you doing?
FWIW, I haven’t figured it all out so my opinion would not be as valuable as yours.
Good link, dgrdfd.
Does Standard & Poors say that actively-managed funds are a world-class scam?
Do you know why “the players in [the mutual fund] profession haven’t been called on it much harder”?
Did your investments beat those of the dopes watching Dancing with the Stars?
I don’t think this should be about any particular Dopers financial situation.
Duhkecco, can you defend actively managed funds in general? There is no theory or real-world results to back them up.
Can you support why they might be a good idea over time for the vast majority of investors? Someone could state that the world is flat and I could commission a sailboat to document that it isn’t but it shouldn’t be up to me to prove such a thing.
Why do you think actively managed funds might be a good idea? It is an honest question and I have never heard a good answer.
UGH, can we stop nitpicking the word “scam”? It has a colloquial meaning…
This is fascinating, how can actively managed funds consistently under-perform the index? A friend of mine was actively trading the S&P 500 the past volatile year. The formula was simple. Every time it had one of its crashes, he bought shares. Every time it rallied, he sold. It was a very simple pattern that went on, based on the observation of the herd effect that pushes prices too far one way then another. And all the wisdom of the managers doesn’t even amount to that? Are they just too stuck being part of the herd? What do people mean it is “mathematically impossible” to beat the market?
Literally, the only thing you had to do was pull out of the S&P as soon as shit started hitting the fan last year, and you would’ve beat it by miles. How is that hard?
Lantern said it best.
If you chart the return of the entire field of actively managed funds, they’ll land on a bell curve. Some will beat the market, some will under-perform the market. All of them tend to regress to the mean over time. They under-perform the market for the investor, because the investor has to pay the fees to the fund manager.
The ‘scam’ part comes in when the fund advertises its past performance as an example of its svengali-like powers of market prognostication, then charges high fees because it’s such a high-return fund. But as they are forced to say, “past performance is not an indicator of future returns”.
There’s a similar phenomenon in sports - the ‘sophomore slump’. A rookie enters the league and has a spectacular year, then lands a great contract. Then everyone is disappointed when the rookie has a mediocre sophomore year. Sometimes you find a Gretzky who truly is outstanding and who will repeat performance, but a certain percentage of rookies simply get lucky, and over-perform. Eventually, their stats regress to the mean.
The general rule of thumb that I follow is that you should never buy individual stocks unless you are an expert in the field that the stock is in, and have some reason to believe that you have insight that the market lacks. This is an extremely high bar to climb, because the market is actually very efficient. So you should rarely buy individual stocks.
If you’re in a stock purchase plan with your company, any time you are given the opportunity to sell stock without penalty, do it. The last stocks in the world you want to own are stocks in the company that employs you, because if the company falls on hard times you could find yourself laid off AND your retirement investment wiped out with the fall of the company.
Index funds are an excellent choice for maintaining a diversified portfolio. You should diversify by purchasing index funds of various types with varying risk/reward ratios, in a mix of foreign and domestic equities.
I agree. But I think that it should be about actual results, not just those of investment funds, but of individual investors.
Are you suggesting that every intelligent, educated person in the world believes that index funds are the way to go? You, yourself, said that you are making a “bold claim”. Why is it bold if everyone accepts it?
Well, I didn’t say that they are. I’m just responding to your claim that actively-managed funds are a scam and that the entire mutual fund industry should not exist. You haven’t provided any evidence to support your claims.
Perhaps this shouldn’t be Great Debates. Maybe you just want to know why actively-managed mutual funds still exist and why they haven’t been shut down by the regulators. Is that what you’re wondering?
They are the herd.
In retrospect, not hard at all. Unfortunately, nobody’s yet figured out how to buy stock in retrospect. But sometimes when the market starts dropping, it’s a good time to sell, since it’s going to get lower, and sometimes when it starts dropping, it’s a good time to buy, since it’s about to come back up. It’s telling the difference that’s hard.
In index funds, and I’m keeping up with the indices.
This OP is unfocused, but as a financial planner I have gone from looking for the funds that will beat the market at the beginning of my career to an acceptance that the evidence in favor of passive (index) investing is overwhelming. Markets are not perfectly efficient, but they are what I would call efficient enough. Efficient enough that the costs to trade and pay the management can not reliably overcome any, usually ephemeral, outperformance.
The best site for those interested in reading about this is www.bogleheads.org. which has a wonderful reference section about investing.
There is every reason in the world for investors to stop worrying about finding the funds that will do well tomorrow and to instead think about other financial issues. A passive portfolio with the right division of stocks and bonds not only is highly likely to outperform, it is also much simpler to maintain. For most people with a million better things to do that should be appealing. I think part of what fools ordinary investors is the idea that selecting two funds, say Vanguard Total Stock Index and Vanguard Total Bond Index, is likely to be more effective than poring over Money magazine and Kiplingers and picking the ‘right’ 25 mutual funds. If you want to cure yourself of this urge then just find a ten year old copy of Money magazine and look at their top funds of the day and see how they have done since.
I do think there are scams in the investment world, which I would define as products that no reasonably educated professional truly believes in. Those would include some high cost annuities and equity indexed annuities along with some types of life insurance. Active mutual funds don’t fit that category as I believe those managers truly believe that the other guys can’t beat the market but they can. Some firms actually do a servicable job, including Vanguard and Dodge and Cox, but that is largely because they keep the cost of their investments low, and thus more comparable to index funds.
If we’re going to argue about this, let’s learn that there is no need to call a managed fund an “actively managed fund.” If it’s managed, it’s managed. If it’s not, it’s an index fund. Managed funds were the term people were going for when they said “mutual funds” early in the thread.
Recently results were published in Australia for research into Superannuation actively managed funds. They found:
*Here is a more worrisome note, though: you can’t beat the market. Or at least, your actively managed superannuation fund cannot beat the market. That is the conclusion of two researchers from the Australian Prudential Regulation Authority (APRA). This is probably unwelcome news from those in the actively-managed superannuation funds business.
“On average,” researchers Wilson Sy and Kevin Liu conclude," value adding from active management appears statistically to be unable to overcome higher costs associated with attempts to exploit market inefficiencies…Higher management expenses leads to poorer net investment performance of the firms."
There are at least two points worth noting in this survey, three actually. First, actively managed funds, on average, don’t beat the market. Unless you know a genius manager, paying for results doesn’t deliver them. Second, the underperformance (by about 0.9%) is directly attributed to the fees you pay. If you invested in a passively-managed index tracking fund, you would do just as well as the market, and not pay a cent.
But the most incriminating finding from the study is that active managers do worse in a bear market! That shouldn’t be too surprising, really. Fund managers are paid to be in the market, not to be in cash. This is true even when you are better switching to a super option more heavily weighted in cash. Cash does not generation commissions!*.
Here is the email I received about it.
One thing that’s rarely brought up in threads like this is volume. It’s relatively easy to beat the market with small sums of money, it’s much harder with very large sums. Give any hedge fund manager $10,000 and I bet he could give you back some quite impressive returns. But when he’s managing 10M, there’s much fewer good deals around and so he has to accept some that post lower returns.
Part of the reason why active funds regress towards the mean is because successful managers are put in charge of more money until they aren’t abnormally successful anymore.
Also, Warren Buffet is proof that there is such a thing as talent. If you put him on a bell curve, he would represent an extreme outlier.
All funds are managed, including index funds. And, not all index funds are created equal.
You can’t just create an index fund and then sit back and get the rate of return of that index. The manager has to decide which financial instruments to buy: individual stocks, futures contracts, options, or ETFs (which, in turn, are a type of index fund). The manager will try to minimize costs and tracking error. There are also issues with the underlying index itself, eg. how the components are added and removed and how often the reconstitution occurs.
There are many references to “actively managed funds” and “active management”, including the Wikipedia article Active management. FWIW, the article says this:
A uy like Warren Buffet buys and holds. Actively-managed funds execute a LOT of trades-and this churning costs the investor.
I think Buffet’s example proves the superiority of his technique.
This what I was wondering! The “studies” that show mutual funds suck just group all the funds together. What about running an experiment where you take information from 10 years ago, try to tell the good funds from the bad, and see how well your predictions would match up? I have a feeling if you weed out the crappies funds, you will go a bit positive.
That’s what I was thinking! That’s why they didn’t pull out late '08. That just doesn’t compute for them. I think if you own an index fund and regularly pull out of the market, you can do better.
That’s true too. You can find a few winners and bet on them, but you can’t put a hundred billion on two horses. You start scraping the barrel, and really lose your game. It’s like all the thinkers who write columns in newspapers. Let them come up with two opinions in a year, and they’ll be good. Ask them to think of something new every week, and you’ll get crap (or they’ll just echo the herd).
I shall defend them!
Someone has to try and “beat the market”, in order to “make the market”.
When I look at my theoretical option to manage my own personal portfolio, buying and selling stock in order to diversify, I don’t, and the argument always boils down to this:
Even though I have a graduate degree in Finance, and consider myself a pretty sharp fellow, I do not have the time, or the resources, or the experience to compete against the big wigs of the financial industry. These guys buy and sell stocks all day every day in amounts that dwarf my lifetime earnings, and put a hell of a lot of time and effort into knowing EXACTLY what they are buying. When a company comes out with an earnings report, these guys read it and decide whether or not to buy/sell/hold and where the stock price “should” be, all before the markets re-open the next day.
The fact that there are mutual fund managers out there trying to beat the market means that all of this financial information gets incorporated into the stock price, fast, and by people who know a hell of a lot more than me. Overall, they can’t beat the market, because in many ways, they ARE the market. Mutual fund managers are especially important because they control vast sums of money.
I invest in index funds so that I can simply ride along on their coattails. They do the heavy lifting, I can trust that the market is at least reasonably efficient, and I get to make (on average) a nice steady return over the years.
Has anyone mentioned Warren Buffett?
The biggest problem with actively managed mutual funds is that the load is usually too high because the stockpickers have a very high opinion of what their opinion is worth.
If you took 100 of the best stock pickers and matched their performance against an S&P fund, I bet an actively managed fund (even if it only balances your investements between different index funds) does better over time than the S&P).
How do you define “long term”?
I looked up what the current 5-year return was on an S&P 500 index fund.
VFINX - Vanguard 500 index investor -.22%
Out of my current mix of funds, 7 of 8 are currently beating this 5-year return:
VWIGX +6.65
VPMCX +4.14
VWELX +4.75
OAKBX -.46
DFIVX +7.04
OAKGX +5.98
SGROX +4.53