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Mutual funds vs. ETFs

edited August 2013 in Fund Discussions
For the past couple of years, I've enjoyed reading and participating in this forum. Most recently, I've enjoyed the thread entitled "Selling PAUDX today" But, most importantly, I want to thank Mr. Snowball, the authors of the "Great Owls" list and many others for their contributions to this forum and to my overall financial education.

After reading Bob C's posting to the "Selling PAUDX today" thread earlier today, I decided to begin this thread. Over the years, I've tried to pick mutual funds and managers who I thought would do over the long run. I also try to pick a few managers/funds that might help in "special situations", for instance in positioning me for what I might think is an upcoming market "downdraft" (see the earlier thread that I started regarding "defensive" mutual funds). I've benefitted greatly from the unbiased advice here.

Given the various ideas (sell it, sell some, buy more) about PAUDX in that thread, I'm beginning to wonder if I should move more toward index ETFs. PAUDX (as one of my "defensive" positions) has shown a poor performance over the past several months. YAFFX (another one of my "defensive" positions) has shown a mediocre performance over the past few years.

I think I'm experiencing the classic problem of the individual mutual fund investor. I try to find good long term managers, but after I find them and purchase, they often then show poor performance. Then I don't know what to do (I think other individual investors are in the same indecisive mode - see the PAUDX thread). I also find myself buying funds near the top of a manager's "hot hand" and selling near the bottom.

Based on my performance benchmarks, I've underperformed over the past ten years, probably in large part due to mistakes described in the previous paragraph. I keep my "pie chart" allocations stable and rebalance annually, so that isn't the problem.

I see mutual funds helping me in two areas in particular, finding managers who will outperform in a down cycle (hopefully, YAFFX and PAUDX will help me there) and finding others who will outperform in less efficient areas of the market (e.g. emerging markets and international small cap). I'm not having much success, though, for reasons described above.

With great respect and gratitude to the contributors to this forum, I pose the following question: Should I just follow our friends' advice at Bogleheads and just purchase index ETFs? Perhaps I could keep a small portion of my portfolio (say 10 or 20%) for the "fun" part of investing - mutual funds. That 10 to 20% wouldn't be part of my core portfolio, but instead flexible global portfolio, long/short mutual funds and the like.


  • edited August 2013
    The user and all related content has been deleted.
  • I have seen studies suggesting that, over longer time periods (5 years plus), the vast majority of active managers do not outperform their benchmarks. Of course some active managers will outperform, but the issue is identifying them and getting in and out at opportune times.

    There are many different ETF portfolios that one can choose from and some do better than others. For instance David Swensen (Yale portfolio) has a great long term track record, but has stumbled recently due to a particularly large holding of TIPs.

    It would be interesting to come back to the "Selling PAUDX today" thread ten years from now and compare actual results to the various opinions therein.

    I realize that, by mentioning ETF managed portfolios here, I might be calling attention to the "800 pound elephant in the room" or whatever that saying is. I'm just hoping to stimulate discussion without suggesting that folks on this forum or Bogleheads are 100% correct.
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