Everytime I come across a book peddling financial guru it reminds me I need to stop worrying about my investments and invest in writing a book. More money seems to be made coaching (through lectures,books and CDs) than actually performing on the financial gridiron.
Interested in adding Susie Orman to your coaching staff? Or maybe as a Rich Mom?

Added to equities today in the downtrodden material and natural resource sector. Could resist no longer.
Bought AA, X, BTU.
Also bought REIT financial: NLY.
Pared BOND.

Reply to @AKAFlack:

Margin is what pros use – and amateurs who know what they’re doing -
to optimize their buying power.

Or, pros and amateurs who think they know better...
First, I highly recommend you keep your margin and cash account separate (even at different brokers). Because if the value of collateral in your margin account drops you will have to come up with additional cash in short order or they will indiscriminately sell your assets and recover their collateral.
Secondly, margin is like performance enhancing drug. It boost the returns nicely in good times. However, market turns on a dime and drops are much more swift and all those margin users who think that they are smarter than all suddenly scrambling to come up cash at the worst possible time. Some will say, they are smart and but lose your shirt. I am sure brokers have seen many of these. Margin use was very common by day traders in 2000 prior to dot com bust.
Margin is one way to lever up. The house buyer is also levering up significantly. You put 5% (or even none) to buy a house $300K and house is your collateral. The problem is that for the lender the house prices did fall so they did not get enough down/collateral to secure their losses and this threatened the well being of all financial system.
I would rather use call/put options even levered ETFs. What you lose is better under your control.
I am amazed that people are even afraid to put money on non-margined pretty vanilla blue chip dividend producing companies and yet now we are talking about margin here.

Sad journalism here, unfortunately. Worse, seems typical of the misinformed hype that gets echoed, unsubstantiated and lemming-like across mainstream financial reporting. I've been a fan of Mr. Berkowitz, as I trust we all know, but this particular accolade I fear is undeserved.

Hi STB65: Self-certified, kinda like "self-regulating" for business and financial powerhouses. I'd make you a nice certificate for free, but I'm right in the middle of major house repair/remodeling, and my wife will kill me if she finds me fooling around on the computer. Again.

Reply to @hank: We'll have to agree to disagree. To me, moving towards fixed income as you get closer to retirement is certainly a 'sound' principle. But I guess my first point was 1) these funds are no more risky than a self guided portfolio of the same equity/FI distribution, and 2) they are perfect for the 'financially challenged', which the general population is (maybe not our MFO crowd as Joe pointed out). The caveat for these funds is that they probably should be chosen by there % equity distribution, not necessarily by their retirement date. If you are retiring in 2020 and are not comfortable holding 70% equities as the TRP 2020 fund does, pick something closer to your risk tolerance, say 2010 at a 60/40 mix. But then again, that would take some financial knowledge that most don't have.
By the way, I also hold TRRIX. Take care.

Hey there Hank-
I understand what you're saying, and you are technically correct. But don't lose sight of the fact that you, and for that matter anyone following MFO or other financially-oriented sites, are light-years away from the "average" non-investor, who knows almost nothing about these matters.
Example: a now-retired policeman and good friend who, rolling down a hill while while grappling with a medium-bad guy, suffered a painful back-injury, Being in his 60's wasn't a beneficial factor, either. My wife and I were aware that he had been awarded an injury settlement, but as we don't discuss investment matters socially, the issue never became conversational.
Some years later, after the 2008 debacle, my friend mentioned that he had "lost everything", as he had "invested in" a variable annuity, which was now "worthless". I know that he is very reticent about discussing financial issues, so I didn't feel comfortable asking any detailed questions, but I think that all of us could agree that a variable annuity was most likely not the best possible choice.
This example is also consistent with the observations of Catch, regarding his long experience with friends, relations, and co-workers. My point, in agreement with Mike and fundalarm, is simply that on the scale of financial choices, Target-date funds are really not such a bad deal, compared to some of the alternatives.
Take care- OJ

Hi Guys,
The investment universe is awash in market future return forecasts. Most of these forecasts properly belong in the trash bucket. I believe most of us suspect that the individual investor loses huge amounts of money in the Futures marketplace.
But private investors are not the only losers in forecasting market returns. The industry professionals suffer this same endemic affliction. Forecasting follies are the rule rather than the exception.
CXO Advisory Group just published its study results from a formal survey called “The Anxious Index”. The Anxious Index is the probability of a recession in the coming quarter based on an extensive formal survey of professional financial and economic forecasters. CXO took these recession prediction data and attempted to correlate the likelihood of recession forecasts with S&P 500 Index returns.
Here is the Link to the CXO study:
http://www.cxoadvisory.com/4240/investing-expertise/should-the-anxious-index-make-investors-anxious/
CXO concluded as follows: “In summary, evidence from simple tests suggest that the “Anxious Index” from the Survey of Professional Forecasters is probably not a useful indicator of future U.S. stock market behavior.”
So this elite group of financial and economic specialists might be able to predict the general direction of the economy, but these forecasts are of doubtful value when trying to extrapolate their economic forecasts to project near-term market rewards.
At least in the short term, the reflexive speculative character of investors overcome any reflective considerations like the health of the economy. That’s disappointing, but can not endure over the long haul. Ultimately, there must be a return to reality. In the end, stock prices reflect GDP growth rate, and that GDP growth is tightly correlated to corporate profits.
Enjoy the CXO study.
Best Regards.

First, congratuations on reaching 79 years of age. Suggest you contact one or more trusted financial advisors/accountants for their tax,estate,daily expenses, etc. advice. ( I say again trusted and especially their advice as to tax and estate implications) as you maneuver toward a different asset allocation. We all, alas, begin to "slip" a bit as we age so I have started involving a trusted family member (or friend) before taking any significant action involving financial advice. Fee only advisors might be best if you are a " do it yourself" type.

Reply to @Old_Joe:
Hi Old Joe,
Permit me to identify several errors in your response and/or direct you to the source of my statements.
In the opening line from your April 29 post to me, you yourself cited my “inappropriate non sequiturs” commentary. You are correct that it did not appear in my original posting, but that was not my reference.
Old Joe, I take issue with your interpretation of your survey. Those members who take the time and make the effort to post on this Board are NOT a representative sample of the MFO readership. In fact, they are a highly not representative cohort. Those who respond to newspaper editorials are not the average “Joe” (no disrespect intended). Averaging the letters-to-the-editor will not yield the general publics perception of an issue. It is not a meaningful statistic.
Also, you generalize far too broadly on the defense afforded David Snowball. If I had not formulated the criticism myself, I might well have joined the chorus rising voice in protest. David is a fine gentleman.
However, it is false to extrapolate from this singular group disagreement with my particular critique to the conclusion that “no one here appreciates your self-important judgmental and haranguing tone of voice”. Although I’m sure some folks would agree with your “opinion” on the matter, your so-called “survey” doesn’t permit that overly general conclusion. The folks you quoted disagreed with my assessment of David’s post, not with my overall writing style.
Lastly, I would propose that from a scientific, and even an investment perspective, consensus can be a very dangerous goal. Centuries ago, the consensus was that the earth was flat, and that the sun revolved around the earth. More recently slavery was an accepted practice. At the turn of the last century eugenics was a highly touted developing science. Thank goodness, these consensus concepts have pretty much disappeared.
Today, the global warming mafia has morphed into the climate change mob ignoring the fact that climate change has been a persistent driver for the earth’s entire history. Indeed, any consensus is a dodgy thing, especially in an investment environment.
A diversity in financial opinions is as healthful as is a diversified portfolio.
Best Wishes.

Reply to @hank: I recall a conversation I had with my sister-in-law several years ago when she was visiting from Europe. I was looking over a correlation matrix I had generated in an effort to optimize fund choice for my Roth account. She asked what I was doing. I explained in great detail my research, Monte Carlo simulations, and so forth. She (who is covered by a pension via her employer) then asked "but what do people who don't have your skills do?". I had no answer. I have no answer now. Certainly the PBS documentary brought to my attention for the first time the forces which brought about the great shift from pensions to 401k's. It angers me almost as much as the bonuses paid out at big banks following the Great Recession.
I understand that studying financial investments is not everyone's cup of tea. I undoubtedly would get fleeced buying a new car. Still, I would hope that for something that is so important as retirement, and which consumes so much of one's earnings, is at the forefront of more people's radar screens. And the NYT economy columnist who dramatically over-extended himself, or the think-tank guy featured in the PBS documentary really have to take a good hard look at themselves. Older people probably still came of age in an era where there was more fundamental trust of institutions; I see this in my parents at times and it saddens me that it cannot be so.
The financial services industry has by no means made it easy for the casual investor (and even Jack Bogle and Vanguard have their own interests to serve), and so I approach them with skepticism. And we in the US live a culture where we're bombarded 24/7 with messages stressing quantity of life over quality of life; everything is a product, we think only for the moment, common sense and financial education are often at a very low level. Circumstances in my life early on caused me to question such messages, but I still struggle to maintain a proper perspective at times. My only answer has been to remain vigilant and empirical and to fight (with mixed success) what I'm sure are very common tendencies. My wife, who I am blessed to have, has also provides an anchor of financial conservatism and common sense when I am otherwise lacking.

Hi Guys,
Do you remember financial economist Ed Yardeni and his dire Y2K prediction?
As the end of the 20th century approached, Ed Yardeni persistently touted the likely computer induced problems that would infect the financial markets because of shortsighted computer programming. He projected a catastrophe. He was wrong. Given the certainty and the absolute timeline of the event, industry directly addressed the potential problem, and took corrective action that worked perfectly. The Y2K event passed without incident.
It took some time given the magnitude and the wide dissemination of his notoriously misguided Y2K forecast, but Yardeni has managed to completely rehabilitate his damaged reputation.
Yardeni is fully recovered and is invited to speak and lecture at many public forums.
If you believe that the markets have solid fundamentals and an upward near-term momentum, Yardeni is your man for positive reinforcement. He is so optimistic that I would describe his analysis as being overtly Panglossian (overly optimistic).
Here is a Link to a recent market forecast short talk he delivered that was recorded on video:
http://www.pionline.com/multimedia/video?bctid=2233341456001&bclid=826020847001
Enjoy. I hope he’s more prescient today than he was in the past. We all have a history of hits and misses. I often disagreed with Ed Yardeni, but I always respected and admired his extensive research, his chart documentation, and his gutsy calls.
Best Regards.

Reply to @Shostakovich: Who can forget the Robert Powell (Marketwatch financial writer)-Madoff fiasco:
http://www.marketwatch.com/story/how-madoff-cost-my-family-a-job-a-401k-and-a-worthy-cause
While there's for sure a huge need for better financial knowledge out there in the general population, I think that shouldn't be the only focus: the corruption, self-dealing, and conflicts of interest that are rife in the financial industry have to be addressed if there's going to be any hope of a non-catfood retirement for the average citizen.

Reply to @Shostakovich: All good points Shos. I guess the underlying question here (perhaps not directly addressed) is: What does society do with all the folk who will grow to be 75, 85 or 100 - NOT having planned for those years? I was young once - and assume everyone here was too. I will say - the Bob Cs, Investors, & Davids are a tiny minority compared to all those who do not view financial planning to be as important as what brand of beer to buy or how jazzy a rig they need to drive in their younger years.
Sadly - I belonged to the later group. Fortunately, have a DB pension and SS to compensate for my earlier neglect. Tomorrow's seniors will likely have neither to fall back on. Now - if these carefree "20 & 30 somethings" were reading MFO, they'd at least have a clue. But, what are the chances of that?
PS : Anybody have the age demographics for MFO?

Reply to @Charles:
Hi Charles,
Many thanks for reading both parts of my overly long submittal. I appreciate your patience, your kind words, and your question.
I am a much more committed buy-and-hold investor now than I was when I purchased my first stock position in the mid-1950s. I was never a rapid fire trader, but I definitely was more active in the past than I currently am. Mine has been an emerging investment philosophy, guided both by practical experience and extensive book readings. I even took a few formal courses.
I have tried both technical and fundamental techniques, have abandoned many of them, and have loosely and selectively adopted a few elements from both disciplines. So my approach is a mixed bag given the uncertain persistency of any of these market tools.
Probably the most significant lesson that I extracted from this long, and sometimes sorrowful , investment history is the wisdom that markets are mean reverting. The marketplace has a strong, compelling pull towards a regression-to-the-mean. All good things end abruptly, so constant vigilance and adaptability are cornerstones for investment survival. But too much activity also hurts performance, so a balance, that is likely different for each market participant, must be identified.
Predating the Peter Lynch method of choosing a stock by personally testing its acceptance and its products, my first stock encounter was Chock Full o’Nuts company after I observed its hugely successful outlets in New York city.
Initially I traded using the Magee and Edwards tome “Technical Analysis of Stock Trades” as a guiding template. Later, I discovered Benjamin Graham’s “Intelligent Investor” book and mutated into a fundamentals-based investor. I discarded many of the principles advocated by both texts, but did retain those that fit my own investment style. At this moment, I invest using a loose and limited mix from both these tool kits
For example, from a technical perspective, several times each month, I still examine the 200-day Indices moving averages to gauge market momentum. Things evolve. In the past, I used the charts constructed from daily price changes; today, I use charts made from monthly reporting frequency. There is statistically a discernable difference. The daily formulation gave far too many false signals.
For example, from a fundamental perspective, I examine Price-to-Earnings ratios to gauge overpriced or underpriced scenarios. I review market-wide profit projections.
From a macroeconomic perspective, I review absolute GDP levels and their growth rates. Demographic shifts, inflation forecasts, and interest rates also influence market returns. I examine the AAII Investor Sentiment Survey to assess the individual investor’s overall emotional feelings from a contrarian’s viewpoint.
I only explore these numbers several times per month. Excessive trading is hazardous to our wealth; excessive market examination is hazardous to our wealth and health.
I do not evaluate these data in any formulaic manner. I suspect that my approach is much fuzzier and less disciplined than many who contribute to the MFO Board. Precise quantification of financial terms can be very misleading and give a false sense of security if the inputs are not accurate, if the data changes in unpredictable whip-like fashion, or if the models are incomplete or entirely wrong-headed. Investment data and analyses suffer from all these deficiencies.
I did not venture into the mutual fund mire until the mid-1980s. My bible for that entry decision was Burton Malkiel’s classic “A Random Walk Down Wall Street”. Until that fateful tipping point my smallish portfolio was 100 % in stock holdings. That book dramatically altered my investment perceptions and style.
Since my Malkiel enlightenment, I have more or less consistently shifted my portfolio away from individual stocks and into mutual funds and ETFs. I sold my last stock position about 5 years ago.
Today, I would classify my investment philosophy as buy-and-hold, but not forever. I typically trade only once or twice a year with a goal to incrementally improve my portfolio by pruning some unwise earlier investments.
I never have personally participated in the sector rotation tactic; I allow my active mutual fund managers to perform that delicate task. I’m simply not well informed enough to play that sensitive game. Again and again those annual Periodic Tables of sector returns demonstrate the volatility and the unpredictability of sector rewards. I am surely not a qualified soothsayer in that arena; I’m not sure anyone else is either.
I do have a few long term market preferences, and my portfolio reflects those biases. I do practice broad portfolio holdings diversification, but I have also overweighed my positions in the health care and the real estate sectors. That’s just me and my special brand of prejudices; I do not necessarily recommend those extra positions for someone else’s portfolio with its specific time horizon, risk aversion, target allocations, and special set of preferences.
In summary, I deploy my small array of market signals to incrementally adjust my top-tier asset allocation mix of equity and fixed income holdings. I do not use these indicators to modify my next level of allocation classes. My modest list of indicators is not sufficiently precise enough to perform that more subtle, sorting task.
I hope this clarifies, but I’m somewhat dubious given the rather disorganized manner by which I make and enforce my investment decisions. In every military battle, plans are modified after the first shot is fired.
Best Wishes.

Hi David,
In most instances I admire and respect your excellent analyses and writings. They are incisive with purpose and actionable meaning for us individual investors.
Given that record, I am greatly baffled by this submittal. Its purpose totally escapes me.
At best, it seems to be the product of hollow and random mind wandering. At worst, it is a carbon copy of those senseless financial and money magazine stories that tout “The 10 best Funds to Guarantee your Portfolio’s Growth”. I know that was not your intent, but the posting smacked from those misguided and mischievous magazine-like articles.
My first-order reaction to the piece was “so what”. What can an active MFO participant extract from the listing to bolster his portfolio? My simple answer is “nothing”. The 10 short term winners in this quarter’s sweep stakes will assuredly be replaced by another equally undistinguished group next quarter. The list just might help gamblers who speculate, but will not aid portfolio construction for the true equity investor.
Your piece lacked balance. Since you identified the 10 best short-term performers and their coupled unseemly returns, it would have been fair to identify the 10 worst performing funds. The downside losses from the bottom rankings are just as startling from these miserable managers. They roughly equal the upside rewards that you referenced in a negative sense.
As you noted, the positive outsized results largely reflect the leveraged design of the fund’s investment policy plus some hot sectors. This highly leveraging tactic almost always propels its proponents to either the top of the rankings or submerges them to the bottom of the heap. And it changes rapidly as does the hot sector becoming icy cold.
I was somewhat dissatisfied that you did not comment on the size of the referenced funds. For the most part these funds are miniscule in size. They are not representative of what the investing population owns or where their net wealth is nested. Size matters. The largest mutual funds have orders of magnitude more investors and more resources; they impact and influence the markets overall direction.
Also, why emphasize this very short time horizon? A more useful set of data would characterize “best” returns for longer test periods; a 5-year record will capture some elements of various market and economic cycles, and will more accurately measure the skill set of an active management. These longer term summary data are readily accessible and more properly symbolize realistic market rewards for the prudent average investor.
The funds that you referenced are likely owned by short-term market speculators, not by the more staid cohort that populates the MFO forum. I doubt if many MFO members would consider investing in a fund that deploys a leverage factor of three. The risk and the price perturbation discomfort levels are just too high.
David, you overwhelmingly generate outstanding analysis and stimulating text; however, this is not one of those illustrious instances. Sorry, but all MFO members should not just be automatic admirers of your work (although we often are); critical exceptions infrequently happen. Pure sycophants do not advance a more informed market understanding.
Please continue your superior fund research and your informative reporting. A uniform work product is a non-achievable target goal. You typically do not miss by much. This is a rare misfire.
Best Wishes.

Reply to @Hiyield007: For those that are interested in PGDIX the A share class PGBAX is offered load waived NTF at Fidelity:
"This fund is now available NTF (No Transaction Fee) and offered load-waived through Fidelity"
The fund has about 300 stock positions 800 bond positions. The stocks are of high dividend payers in Utility, Real Estate, Energy and Financial sectors mainly. The bonds are high yield (junk). Basically the fund is investing in highly leveraged companies. The manager seems to try to control individual company risk by keeping positions very small. P/E for stock side is a bit on the high side (16.36) and PEG ratio is 2.47. So, it is expensive by those measures. The high yield bonds have given a kick in performance boost in recent years. But with the HY bonds losing momentum, the fund has been behaving more inline with Conservative/Moderate allocation balanced funds. I personally hold GLRBX and I like VWINX a lot. I get my HY bond exposure through specialist MWHYX fund at this time.

Hi Guys,
Here are a few further thoughts and interpretations that expand on Part 1 of my earlier post.
There is little doubt that funds flourish that do generate positive Alpha. However, they are few in number and their excess rewards over time are modest and unreliable at best. In a portfolio that has many active fund holdings, it is highly likely that any such positive contributions will be neutralized by those actively managed funds that are underperformers.
The mutual fund landscape is heavily populated by these underperformers. The positive Alpha funds do not adequately compensate for the many more losers. It is an asymmetric playing field. Kahneman’s Prospect Theory addresses this issue.
Additionally, a regression-to-the-mean is forever operational in the investment universe. For any extended time horizon, this regression law erodes any annual superior results. It is a challenging task to identify any fund (especially a-priori) that will consistently deliver plus Alpha outcomes. Good luck in this unpredictable domain.
It is an amusing oxymoron that actively managed mutual funds always tell us that “Past performance is not indicative of future performance”, yet they also, almost instantaneously, ask that you favorably evaluate their superior past performance. This obvious disconnect doesn’t seem to trouble them. It does trouble me.
The mutual fund industry is populated by very smart professionals. These well-trained, organized, and competitive participants tend to neutralize one another. The more I explore these issues, the more I am convinced that the search for superior mutual fund managers is all a grand waste of time. I’m venturing more and more into the Index world arena.
Whenever questioned, active fund managers always appear to have a reasonable story, a respectable approach, and an attractive strategy for promised success. Subsequent performance data uncovers the weaknesses of their methodology; failures are abundant and returns are often disappointingly dismal. Annually, a large percentage of actively managed products exit the battle field. By itself, that’s a telling and a tilting lesson.
I am sure David Snowball is very careful and fully alert when conducting his fund manager interviews. His probing must be an uneasy assignment. He deals with smart, talented, and focused fund managers, These guys may or may not be superstar money managers, but they are all superstar salesmen. Their presentations reflect their agenda and their incentives. Professor Snowball is well trained to separate the wheat from the chaff using learned skills, a cautionary examination, and a healthy dose of skepticism. I don’t envy him his task since fund managers are adroit at decoying the chaff to resemble real wheat.
I have arrived at my own decisions on this matter. I am shifting my portfolio much more dominantly towards the Index direction. I conclude that the accumulative evidence is overpowering. Chart 1 in this submittal is devastating evidence against active management from both a time and a numbers perspective. The shocking finding is that diversification among active managers doesn’t improve the situation; it likely amplifies the negative impacts of cost drag and the poor trading habits of these managers. Surely there are a few atypical exceptions.
As usual, you are the boss of your own portfolio; you own it. You are free to take charge, to develop your own plan, and to execute that plan. My hope is that the data I collected for this posting will allow you to make a more informed decision that adds strength to your portfolio and provides you more comfort in your decision making. I wish you luck.
In his classic book “Thinking, Fast and Slow”, Daniel Kahneman repeatedly reverts to the tension between clinicians and statisticians. That same tension exists among all investors, and even within the MFO clan. At least part of that tension is driven by an individuals lack of a statistical education. That hole in his education will eventually cause a hole in his financial decision making, and finally a shortfall in his portfolio’s performance. By downsizing or ignoring statistical analysis an individual investor enhances his risk without a compensating reward. He is truly flirting with a disaster of his own design.
Years ago, I initiated my participation in Fund Alarm, and later in the MFO site, to encourage a broader understanding and a fuller utilization of statistical methods. I remain dedicated to that goal regardless of wordsmith harassments (never direct attacks against the statistical procedures themselves) against that purpose. I am not dissuaded from that objective; I will continue the march.
I’ll be talking to you guys occasionally further down this bumpy, twisting, and sometimes discontinuous investing road. Black Swans do make the road discontinuous.
It’s fitting to close with an ancient Chinese saying credited to Lao Tzu: “If you don’t change direction, you’ll end up where you are heading.” You folks get to decide if a revised compass heading is needed.
Best Regards.

Hi Guys,
Kenny Rodgers said it best of all in his song “The Gambler”. He sang: “you got to know when to hold’em, know when to fold’em, Know when to walk away, and know when to run.” That’s a pile of choices. A superior decision depends on assessing each event’s odds and its payoff matrix.
The 911 terrorist attack is a tragedy that directly caused the deaths of 3000 folks. That incident prompted some of us to substitute auto travel while abandoning air travel. Statistically, on a per passenger mile traveled basis, the auto death base rate is far more hazardous than the same metric is for air transportation. The statisticians estimate that an additional 3000 secondary deaths can be attributed to the unfortunate choice in the alternate travel mode. Many choices, some wise, some not so prudent.
Knowing the odds is a primary consideration in any gambling adventure, and odds are silently rooted in most of life’s decisions. Most folks would acknowledge that it is necessary know-how when applied to investment decisions. Recognizing the odds is directly coupled into knowing and understanding statistical data.
As Gary Belsky and Thomas Gilovich observed in their “Why Smart People Make Big Money Mistakes” book: “Odds are you don’t know what the odds are.” The purpose of this posting is to eliminate that deficiency by defining some of those odds when making active/passive mutual fund management choices.
Ed Thorp gained fame for his analysis and development of Blackjack odds tables to maximize payoffs with proper play decisions. He reported his findings in his amazingly popular book “Beat the Dealer”. If you don’t know or don’t deploy the odds of that card game, you are doomed to suffer endless losses. Ed Thorp is now more commonly recognized as a successful hedge fund manager who delivers rewards annually in the same class as Warren Buffett. Indeed, a few investment wizards do exist and prosper.
John Bogle’s constant reminder that costs matter greatly in the financial casino is also extremely pertinent, especially in an environment whereby the expected near-term rewards are below historical averages. In that casino, Bogle charges that the advisors game is to convert all your money into his money by multiple incremental fees that bolster his payday to the detriment of your end wealth. Many advisors, consultants, media gurus live by their wit and salesmanship, not by their financial wisdom. Fees are wealth depleting lodestones, a lasting money transfer device.
Daniel Kahneman makes the case that these smart professionals know what they don’t know, but perverse incentives are operative. It’s a financial perversion of Donald Rumsfeld’s unknowable unknowns quote. Numerous studies document that financial professionals fail to correctly forecast the future. IPOs are often losers and CEO energized mergers typically lose money for the acquiring firm. Wall Street recognizes these shortcomings by often lowering the stock price of the “successful” acquiring firm just before and immediately after the acquisition happening. The more famous the CEO, the more likely he will stumble with an overreaching acquisition.
Wall Street is dominated by perceived smart money managers who invest gigantic sums mainly for rich institutional agencies. These institutions now constitute 70 % of the daily trading volume and employ the smart money manager cohort. These guys know and deploy statistics in their decision making. Those of us who do not acknowledge the practical need for statistical analysis serve as target punching bags for those who do. Please use statistics when making all your investment decisions.
An overarching conclusion from a host of academic and industry studies illustrate the futility of active investing to produce returns that exceed benchmark Indices, some positive net Alpha. Research and trading costs impose too high a hurdle to overcome. This conclusion is not without exceptions, just that these exceptions are rare.
Superinvestors do exist. Warren Buffett’s 1984 seminar at Columbia University “The Superinvestors of Graham-and-Doddsville" pays homage to the teachings of Benjamin Graham while simultaneously identifying a few members of this select group.
But the odds of having immediate access to this select group are indeed challenging. You need a huge bankroll to invest with George Soros. Given these daunting hurdles, we individual investors should consider passive investing as a viable and acceptable option. Just maybe, market-like returns are not so bad given the rather poor performance records of so many active mutual fund managers.
Just what are those odds? I’ve cobbled together a couple of tables that characterize the odds. The tables should help guide your investment decision making. I call these decision matrices Odds Maps. These maps have many fundamental dimensions.
The first table is titled “The Probability that an Actively Managed Portfolio will Beat Index Funds”. It was lifted from The Tao of Wealth website. That website provided it as a summary from Rick Ferri’s “The Power of Passive Investing” book. In that book, Ferri credits Allan Roth as the primary source of the data set. These things seem to be very well traveled. Here is the data.
1 year 5 years 10 years 25 years
1 active fund 42 % 30 % 23 % 12 %
5 active funds 32 % 18 % 11 % 3 %
10 active funds 25 % 9 % 6 % 1 %
This odds table for actively versus passively managed mutual funds is given as a function of the time dimension and the number of funds dimension. Both influence expectations. In general, they were generated based on countless Monte Carlo simulations completed by Allan Roth. These data are consistent with S&P persistence scorecard studies.
Other studies show similar findings. The specific numbers change a little with each study, but the trendlines are invariant. Eric Kirzer, a Toronto professor, displayed comparable results in a 2000 paper titled “Fact and Fantasy in Index Investing”. Roth published his research in a 2010 Forbes article called “A Winning Fund Doesn’t Equal a Winning Portfolio”.
Rick Ferri did his own analysis that emphasized the asymmetric nature of excess profits from winning actively managed funds and their sub-performing losing counterparts. Overall, portfolio positive Alpha odds increasingly degrade as the number of actively managed components increase and as the timeframe expands.
The keystone input is the baseline rate statistic for a single fund for a single year. Daniel Kahneman strongly underlined the need to always start an assessment with the base rate as a point of departure. Perturb it only if conditions warrant a modification. Remember that bad active managers do disproportionate damage to returns.
Costs are always constant regardless of successes or failures either in the open marketplace or because of portfolio preferences. Burton Malkiel famously remarked that “ Great track records tend not to persist, but high expenses do.”
Depending of your specific preferences (very optimistic or pessimistic) the baseline rate should be adjusted either moderately upward or downward. You should mentally adjust the table to suit you special needs and/or world views.
As a second useful table, I constructed a 2 X 2 matrix that shows the likelihood of positive annual return probabilities in both the managerial style dimension and the trading frequency dimension. The basic data used to complete the table come from both academic work and the DALBAR industry surveys. The probabilities depicted are the likelihood (the odds) of positive annual returns.
Active Management Passive Management
Dynamic Tactical Trading 30 % 60%
Static Strategic Trading 50 % 70 %
Note that I anchored the two extreme input (the dynamic tactical active and the static strategic passive) components using historic data sets. The 70 % odds input is simply the positive annual equity return frequency from market history. The 30 % baseline rate for the dynamic tactical active box (mostly higher trading activity) was lowered below the 42 % value quoted in the first table to honor a more subtle observation that all active managers are not necessarily frequent traders; some active managers hold positions for rather lengthy periods so the baseline rate should mirror that semi-inactive tendency to produce better returns. Frequent trading is hazardous to end wealth.
The other two tabular inputs are my approximations given that the scale ranges from the baseline rates of 30 % to 70 %. Also note that the proposed numbers are simplified to a single digit value. This properly represents the level of accuracy anticipated for these rough inputs. Any attempt to be more precise is illusionary (perhaps even delusional). Again, I recommend any adjustment that echoes your specific circumstances, preferences, or insights.
Additional comments follow in Part 2 of this long posting.
Best Regards.

Reply to @msf: "The larger cap funds have done okay, but some small caps - which were supposed to be Brideway's bread and butter - have not." - They haven't? While I've never had significant holdings in Bridgeway large cap funds, I'm up 60% on my Bridgeway small cap holdings. Be careful about how you select end points because you're not buying the last XX years of returns, you're buying returns from the day you purchase the fund until the day you sell it.
To your point about risk-taking: I am encouraging high volatility and high active share, not risk which is something else entirely that has to do with the personal consequences of not having the purchasing power you need at the time you need it. Management companies discourage this by limiting the scope of a fund's investment universe and, if you think about it, as the universe of investments available to an individual human manager shrinks it eventually becomes inevitable that he is guaranteed to track the index minus fees (because, in the limit, if the index only has 1 stock then there's nothing the manager can trade to distinguish himself). One of the worst things about Bridgeway, IMO, is that they limit their scope to domestic stocks even though their best and oldest funds do retain fairly broad mandates.
And, yes, you are correct that management companies are also already motivated without performance-based fees, but the problem is that they're equally motivated to obtain their profits by fooling investors (including those using "studies" to claim definitive "proof" as to whether or not the fund does indeed benefit investors) as they are by beating the market. So the motivation provided by performance-based fees are more specific to our goals as investors.
Finally, my comment regarding charitable efforts was not about the half of Bridgeway profits that goes towards the Bridgeway Foundation, it's about the other half which goes to the personal coffers of Bridgeway employees because it seems to me that these employees do more good for mankind with their personal resources (time afforded by having their expenses paid, etc) than the incompetent and sometimes dishonest fools working at the vast majority of nonprofits. So my idea is that the best way for me to make sure that I support efficient charity or do-gooding (which is not necessarily related to the government's ideas of "charity") is to ask the principals of that do-gooding to prove their ability to execute their visions by earning my financial support (under the same capitalist theory of competition I use to decide which businessmen will receive my dollars for their selfish and uncharitable visions) instead of undermining their own credibility by behaving like the helpless beggars to whom they're supposedly attempting to exhibit compassion (as in the typical nonprofit arrangement). This isn't to say that all nonprofits are inept, but on the continuum of charitable effectiveness I think it's best to first endorse "for-profit" do-gooders whose personal profits are in support of their personally charitable lifestyles, then nonprofits that might be well influenced by association with these paragons of humanity, and lastly nonprofits for whom charity is simply another job except without the pressure of competition to force them to get it right. I generally don't give money to nonprofits because I believe that charity is way too important to ignore the adage that "if you want something done right, you have to do it yourself" and, since the principals of Bridgeway seem to share a similar view, I hope that collaborating with them in my for-profit investment endeavors will prove an efficient way to achieve my overall goals as well.