Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
"You may be thinking that, if passive is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.
Consider this. In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn't work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation.
That requires investing it. For example, it would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 index (stocks), you would have $5,386."
I love this assertion that the past stock market's performance is prelude to the future market's performance. Let's assume that indexers are right and that stock performance truly is a "random walk," which active managers can't predict and therefore can't beat. Why accept the other notion indexers believe in then that in the "long run stocks always go up" if it is truly random? The 104 years of market history this author cites is less than a heartbeat in the history of the planet. Just because markets have gone up in the past is no guarantee they will go up in the future. Rising markets are not a law of nature like gravity in physics. There is no guarantee even that stock markets will continue to exist. There is a historical precedence for markets disappearing altogether as happened to Russia in the 1910s during the Russian revolution: https://the-international-investor.com/2011/st-petersburg-stock-exchange-1865-1917-diversification-pays-emerging-markets
Can an active manager predict when the next bubble will burst or some major geopolitical event is about to occur with any certainty? No, but they can at least react defensively to it when a blind mechanical index can't. What indexing's triumph proves is not that markets are efficient, always rising and therefore unbeatable. It proves that costs matter. Costs are the one thing in funds you can predict will have an impact with a fairly accurate degree of mathematical certainty. Not just expense ratios, but trading costs and market impact costs. But a low cost, low turnover actively managed fund with a manageable level of assets can be a better investment than a mechanical index fund.
I think far too many people confuse 'low costs' with 'indexing' .... speaking for myself only, I'd prefer low-cost low-turnover active management over low-cost indexing in nearly every instance. (Plus, most indices are market-cap-based, which I don't like anyway.)
Indexing isn't a bad thing, and I don't bash the idea -- it's just not something that *I* prefer.
I think far too many people confuse 'low costs' with 'indexing' .... speaking for myself only, I'd prefer low-cost low-turnover active management over low-cost indexing in nearly every instance. (Plus, most indices are market-cap-based, which I don't like anyway.)
Indexing isn't a bad thing, and I don't bash the idea -- it's just not something that *I* prefer.
If you don't like that indices are market-cap based, why don't you still use low-cost index funds, but change your allocation between team to provide your desired market-cap exposure?
You do need to watch out for managers who essentially mirror an index by their breadth. That's why something like FMIJX is appealing...it holds only a small basket of well-considered stocks...and lives or dies with their performance.
If I read you correctly, you're saying rather than use 1 index fund, use several to base my exposure? I'm not sure how that changes anything since you'd still be using market-capped vehicles -- just more of them.
If you don't like that indices are market-cap based, why don't you still use low-cost index funds, but change your allocation between team to provide your desired market-cap exposure?
I have always contended that the reason so many active managers underperform is not because markets are efficient, but because of structural problems within the money management industry and behavioral problems within managers themselves. To put it bluntly, greed, conflicted interests and the herding instinct to closet index are all built into the system for most managers. Managers serve two masters--fund shareholders and fund company owners--and the latter too often cares too little about the former.
There are ways to appropriately incentivize managers to put fund shareholders first, compensating them solely on long-term risk adjusted returns as opposed to asset gathering, but few fund shops follow this practice and thus deserve to go extinct from the index onslaught. Another way is to insist that managers invest a significant portion of their net worth in their own funds. Again, few managers do this.
But imagine a fund where the manager was an employee of the fund, not of a fund management company with an external set of shareholders seeking to profit off of asset gathering. Imagine a fund where the management fee was a fixed or flat number, not based on assets, and a bonus was allotted based solely on the manager outperforming a benchmark on a risk-adjusted basis over five years--a full market cycle. Meanwhile, the manager was required to invest a significant percentage of his/her liquid net worth in the fund. Such a structure I would argue would have a better chance of beating the market than the way funds are designed today.
Closet indexing is another problem as managers face career risk from underperforming a surging benchmark to a significant degree, so most herd together and try not to deviate too much from the benchmark. After fees obviously they will underperform but not so much they will get fired.
I would contend that there are only a handful of money managers who behave as true fiduciaries and always put shareholders needs first. That is why so many underperform in my view, not because markets are efficient.
@LewisBraham, I totally agree that there are a very limited number of active managers that are worth investing in, including:
PRWCX, VWIAX, VWELX, POAGX and other Primecap funds if open, MINIX, FMIJX, ARTGX, BCOIX, BPLSX, MSFAX, SIGIX, PIMIX, MTOIX, PRGTX, PRHSX, QLEIX, WHAIX, GLIFX, VSTCX, MACSX and MAPIX. There may be a few others, but not many.
Not saying this is the gospel that everyone should follow ... But, to meet my investment goals I use mostly active funds over index funds.
The only Index mutual fund that I currently use (from time-to-time) as a special investment position is INVESCO's equal weight S&P 500 Index fund (VADAX) as it covers both the large and mid cap space when I wish to overweight equities in the growth area of my portfolio.
On the income side of my portfolio I'll use an active managed bond fund over an index fund should I wish to overweight bonds. Keeping within the same fund family I use STBAX or ACPSX should I wish to move money from stocks to bonds through nav exchanges.
At this time cash is king as I hold no spiff position(s) in either stocks (due to their high valuation) or in bonds (due to an anticipated rising interest rate environment). However, I favor stocks over bonds and my portfolio bubbles at 45% fixed (which includes 20% cash) and 55% equity (including 5% other as defined in Xray). Thus, from a neutral 50/50 allocation I am +5% equity at this time.
Back in October of 2016 I made a post titled "Looking Out ... Towards Year End!" where I projected a year end close for the S&P 500 Index at 2235 (it's 2016 actual close 2239). A link to this post is provided below. Currently, I have a projected 2017 close for the S&P 500 Index at 2475 in another post started by @MJG titled "Blind Forecast" which is also linked below.
With this, I wonder what others might be thinking now that we are in 1Q2017? For myself, I am going to run with my current positioning detailed above at +5% equity along with being cash heavy. And, do you use active or passive index funds to achieve your goals? For me I use mostly active.
Sorry, @JohnN as I seem to have hijacked your thread; but, I wanted to keep the board actively engaged since @Ted has not visted since the 9th. Wonder where he is? I mailed him a card today thinking he might not be well.
Most active managers think they are innovative, special, gifted, and above average, but they aren't. SPIVA is not a "noisy repeat" of jack squat !
SPIVA is fact. SPIVA is truth. The truth will set you free.
In truth, many active managers try to beat their benchmark my being DIFFERENT from their benchmark, by venturing into different market cap stocks or using bonds and cash to their advantage. But most fail as evidenced by the SPIVA data.
Sam Lee should have stuck with "For what it’s worth, I happen to believe that index funds are the best options for most investors" without the rest, "most of the time—just not for all investors, all of the time."
I agreed with most of your observations and assessments of both the pros and cons for using active fund managers when assembling and maintaining a portfolio.
However, I was reluctant to continue reading your submittals on this topic after reading your opening paragraph. It is angry and harsh. It distorted what the reference piece actually did say. You unwisely established a false straw man. For a professional writer that is an absolute no-no.
I'm sure you don't need it, but some MFO members might benefit from a formal definition of a straw man argument. A straw man is "Substituting a person’s actual position or argument with a distorted, exaggerated, or misrepresented version of the position of the argument".
The author of the referenced piece never "asserted" that past performance would be "a prelude to the future markets performance". The author merely used the market historical data as an illustrative example. All of us do this all the time, and that includes you.
The author recommended 4 familiar investing maxims: control expenses, diversify, limit taxes, and be disciplined. These are all rather generic, and most investors accept them as guiding principles. In your subsequent comments you seem to also endorse them. You do not seem to take exception to any of the primary actions that the author advocates.
I too conclude that active fund managers can contribute to a balanced portfolio in terms of reducing risk. There is a price (costs) to be paid for that protection. I maintain a mixed portfolio that includes both active and passive holdings so I have opted to pay the price. I really don't expect Excess Returns; I'm targeting lower volatility and some downside protection. Lately, I have been shifting my portfolio more heavily in the passive, Index direction. Costs do matter more when expected returns are muted.
I mostly like your thinking on these investing matters so I hesitated to post. I don't want to be picayune here since I agree with major, major portions of your assessments. But you unfairly dismissed the referenced article using false assertions.
A very unfair, not so difficult, reference to a busybody with wrong advice.
When submitting to MFO, I make a sincere and mostly successful effort to not give investment advice whatsoever. I don't know enough to do so. I try to simply provide references that might inform and/or entertain MFO participants. I never make fund recommendations and I don't identify my specific holdings.
I really do believe that each investor is unique with unique goals, skills, and resources. Therefore,,specific advice fails when delivered on this Internet forum. I am definity not a Polonius type contributor; you completely misrepresent me.
For someone with an engineering degree who is a master of the longueur to say to a writer "You unwisely established a false straw man. For a professional writer that is an absolute no-no" is the embodiment of being a busybody. Further compounding the problem is to be so obnoxious and patronizing as to feel the need to explain to readers what the definition of a straw man is. Stop telling me how to write and I won't tell you how to be a retired engineer.
The bottom-line is that you seem to consider it an acceptable practice, when reviewing an article by another professional, to insert a nonexistent straw man. I do not. It is plain dishonest. It is a loser's policy. But you get to make your own bed. Sobre gustas no hay disputa.
In the future, I will read your postings with some skepticism. However, I will continue to read them to become more informed.
Your last post is unabashedly acrimonious. Too bad and too unprofessional. I would never have won engineering contracts if I had fabricated straw man scenarios in my business proposals.
I harbor no grudges. I was somewhat surprised by the vindictiveness of your last reply, given that I was very complimentary to the vast majority of your comments in your review. Does that reflect a thinskin? I hope not. Narcissism is never a good thing. Even the best market writers make an occasional error.
@MJG "Narcissism is never a good thing." Look in the mirror and you'll see one, Polonius. You like to hear yourself talk. I set up no straw man. And this "loser's policy" comment has an all too familiar ring to it. Your posts aren't "unabashedly acrimonious." They are passive aggressive, patronizing, snide and condescending while pretending to be neutral. I prefer unabashedly acrimonious.
@rforno- Yes, it's a shame that MJG frequently incites our worst... try to ignore us. Sometimes his patronizing and condescending remarks are just too hard to ignore. The interesting thing is that after all of these years of this crap he still professes to be "somewhat surprised by the vindictiveness" of our reactions. A real slow learner, that fellow is.
Denial is no defense. Simply reread the referenced article and your opening paragraph. What you claimed the author stated just never happened. That's a classic straw man. You either misread the article or elected to misrepresent it. Either way, it was an error.
Without name calling that's all I intended to say. This should not be such a heated exchange. I have controlled my emotions and endeavored to just be factual. I expected a reciprocity that was not delivered. Too bad!
From my perspective this hostile exchange was never needed and has surely run a full course. At this juncture I will end my posts on this distasteful and unpleasant matter.
MJG is helpless and clueless about his condescension, so yeah, let it pass by unremarked wherever possible. Engaging is futile cuz you get only more of the same tiresome finger-wagging.
@davidrmoran: I am indeed somewhat surprised by the vindictiveness of your reaction. Your last post was not only acrimonious, but unabashedly acrimonious! Narcissism is never a good thing: the master himself hath so proclaimed. Square away, Jack!
Investment portfolio science is always evolving. There is a big push towards the low fee, indexing narrative as it is a huge profit center and the financial industry flocks to where the sales $ exist.
The 21st century has afforded the investor and portfolio researcher alike, the benefit of the use of ETFs that focus on underlying academically based CAPM "factors" and other attributes. Implementing these products within a tactical framework can provide much more flexibility in the goal towards asset accumulation https://docs.google.com/document/d/14OG8dGZolcXg7WGy_vGFN1dTJq1TccfgKwK7x27HAAA/edit?usp=sharing.
The additional innovation of "motif" investing allows users and investors to build managed portfolios that other retail investors can track and invest in; this without the staffing, SEC approval, advertising, legal, etc. involved with the launch of funds and maintenance of running a "brick and mortar" fund enterprise.
I now believe that it is nuts to use active equity funds in taxable accounts . SInce 2014 my taxes have been destroyed by unwanted distributions. Obviously carry over losses from 2008-2009 were exhausted in that year and following /
Comments
Can an active manager predict when the next bubble will burst or some major geopolitical event is about to occur with any certainty? No, but they can at least react defensively to it when a blind mechanical index can't. What indexing's triumph proves is not that markets are efficient, always rising and therefore unbeatable. It proves that costs matter. Costs are the one thing in funds you can predict will have an impact with a fairly accurate degree of mathematical certainty. Not just expense ratios, but trading costs and market impact costs. But a low cost, low turnover actively managed fund with a manageable level of assets can be a better investment than a mechanical index fund.
LB: Bingo!!
I think far too many people confuse 'low costs' with 'indexing' .... speaking for myself only, I'd prefer low-cost low-turnover active management over low-cost indexing in nearly every instance. (Plus, most indices are market-cap-based, which I don't like anyway.)
Indexing isn't a bad thing, and I don't bash the idea -- it's just not something that *I* prefer.
SPIVA
Currently we own these passive and smart beta ETFs/funds: VXF (equivalent to TSP S fund which we own), DSEEX, SPHD and PXH.
Kevin
If I read you correctly, you're saying rather than use 1 index fund, use several to base my exposure? I'm not sure how that changes anything since you'd still be using market-capped vehicles -- just more of them.
There are ways to appropriately incentivize managers to put fund shareholders first, compensating them solely on long-term risk adjusted returns as opposed to asset gathering, but few fund shops follow this practice and thus deserve to go extinct from the index onslaught. Another way is to insist that managers invest a significant portion of their net worth in their own funds. Again, few managers do this.
But imagine a fund where the manager was an employee of the fund, not of a fund management company with an external set of shareholders seeking to profit off of asset gathering. Imagine a fund where the management fee was a fixed or flat number, not based on assets, and a bonus was allotted based solely on the manager outperforming a benchmark on a risk-adjusted basis over five years--a full market cycle. Meanwhile, the manager was required to invest a significant percentage of his/her liquid net worth in the fund. Such a structure I would argue would have a better chance of beating the market than the way funds are designed today.
Closet indexing is another problem as managers face career risk from underperforming a surging benchmark to a significant degree, so most herd together and try not to deviate too much from the benchmark. After fees obviously they will underperform but not so much they will get fired.
I would contend that there are only a handful of money managers who behave as true fiduciaries and always put shareholders needs first. That is why so many underperform in my view, not because markets are efficient.
The Efficient Fund Hypothesis
@LewisBraham, I totally agree that there are a very limited number of active managers that are worth investing in, including:
PRWCX, VWIAX, VWELX, POAGX and other Primecap funds if open, MINIX, FMIJX, ARTGX, BCOIX, BPLSX, MSFAX, SIGIX, PIMIX, MTOIX, PRGTX, PRHSX, QLEIX, WHAIX, GLIFX, VSTCX, MACSX and MAPIX. There may be a few others, but not many.
Kevin
Not saying this is the gospel that everyone should follow ... But, to meet my investment goals I use mostly active funds over index funds.
The only Index mutual fund that I currently use (from time-to-time) as a special investment position is INVESCO's equal weight S&P 500 Index fund (VADAX) as it covers both the large and mid cap space when I wish to overweight equities in the growth area of my portfolio.
On the income side of my portfolio I'll use an active managed bond fund over an index fund should I wish to overweight bonds. Keeping within the same fund family I use STBAX or ACPSX should I wish to move money from stocks to bonds through nav exchanges.
At this time cash is king as I hold no spiff position(s) in either stocks (due to their high valuation) or in bonds (due to an anticipated rising interest rate environment). However, I favor stocks over bonds and my portfolio bubbles at 45% fixed (which includes 20% cash) and 55% equity (including 5% other as defined in Xray). Thus, from a neutral 50/50 allocation I am +5% equity at this time.
Back in October of 2016 I made a post titled "Looking Out ... Towards Year End!" where I projected a year end close for the S&P 500 Index at 2235 (it's 2016 actual close 2239). A link to this post is provided below. Currently, I have a projected 2017 close for the S&P 500 Index at 2475 in another post started by @MJG titled "Blind Forecast" which is also linked below.
http://www.mutualfundobserver.com/discuss/discussion/29664/looking-out-towards-year-end#latest
http://www.mutualfundobserver.com/discuss/discussion/30998/blind-forecasters#latest
With this, I wonder what others might be thinking now that we are in 1Q2017? For myself, I am going to run with my current positioning detailed above at +5% equity along with being cash heavy. And, do you use active or passive index funds to achieve your goals? For me I use mostly active.
Sorry, @JohnN as I seem to have hijacked your thread; but, I wanted to keep the board actively engaged since @Ted has not visted since the 9th. Wonder where he is? I mailed him a card today thinking he might not be well.
Old_Skeet
SPIVA is fact. SPIVA is truth. The truth will set you free.
In truth, many active managers try to beat their benchmark my being DIFFERENT from their benchmark, by venturing into different market cap stocks or using bonds and cash to their advantage. But most fail as evidenced by the SPIVA data.
Sam Lee should have stuck with "For what it’s worth, I happen to believe that index funds are the best options for most investors" without the rest, "most of the time—just not for all investors, all of the time."
Kevin
I agreed with most of your observations and assessments of both the pros and cons for using active fund managers when assembling and maintaining a portfolio.
However, I was reluctant to continue reading your submittals on this topic after reading your opening paragraph. It is angry and harsh. It distorted what the reference piece actually did say. You unwisely established a false straw man. For a professional writer that is an absolute no-no.
I'm sure you don't need it, but some MFO members might benefit from a formal definition of a straw man argument. A straw man is "Substituting a person’s actual position or argument with a distorted, exaggerated, or misrepresented version of the position of the argument".
The author of the referenced piece never "asserted" that past performance would be "a prelude to the future markets performance". The author merely used the market historical data as an illustrative example. All of us do this all the time, and that includes you.
The author recommended 4 familiar investing maxims: control expenses, diversify, limit taxes, and be disciplined. These are all rather generic, and most investors accept them as guiding principles. In your subsequent comments you seem to also endorse them. You do not seem to take exception to any of the primary actions that the author advocates.
I too conclude that active fund managers can contribute to a balanced portfolio in terms of reducing risk. There is a price (costs) to be paid for that protection. I maintain a mixed portfolio that includes both active and passive holdings so I have opted to pay the price. I really don't expect Excess Returns; I'm targeting lower volatility and some downside protection. Lately, I have been shifting my portfolio more heavily in the passive, Index direction. Costs do matter more when expected returns are muted.
I mostly like your thinking on these investing matters so I hesitated to post. I don't want to be picayune here since I agree with major, major portions of your assessments. But you unfairly dismissed the referenced article using false assertions.
Please keep the good stuff coming.
Best Wishes.
A very unfair, not so difficult, reference to a busybody with wrong advice.
When submitting to MFO, I make a sincere and mostly successful effort to not give investment advice whatsoever. I don't know enough to do so. I try to simply provide references that might inform and/or entertain MFO participants. I never make fund recommendations and I don't identify my specific holdings.
I really do believe that each investor is unique with unique goals, skills, and resources. Therefore,,specific advice fails when delivered on this Internet forum. I am definity not a Polonius type contributor; you completely misrepresent me.
Best Wishes.
http://awealthofcommonsense.com/2017/01/great-to-see-you-active-management-are-you-still-alive/
The bottom-line is that you seem to consider it an acceptable practice, when reviewing an article by another professional, to insert a nonexistent straw man. I do not. It is plain dishonest. It is a loser's policy. But you get to make your own bed. Sobre gustas no hay disputa.
In the future, I will read your postings with some skepticism. However, I will continue to read them to become more informed.
Your last post is unabashedly acrimonious. Too bad and too unprofessional. I would never have won engineering contracts if I had fabricated straw man scenarios in my business proposals.
I harbor no grudges. I was somewhat surprised by the vindictiveness of your last reply, given that I was very complimentary to the vast majority of your comments in your review. Does that reflect a thinskin? I hope not. Narcissism is never a good thing. Even the best market writers make an occasional error.
Best Wishes.
I'm just someone who invests in mutual funds.....
Denial is no defense. Simply reread the referenced article and your opening paragraph. What you claimed the author stated just never happened. That's a classic straw man. You either misread the article or elected to misrepresent it. Either way, it was an error.
Without name calling that's all I intended to say. This should not be such a heated exchange. I have controlled my emotions and endeavored to just be factual. I expected a reciprocity that was not delivered. Too bad!
From my perspective this hostile exchange was never needed and has surely run a full course. At this juncture I will end my posts on this distasteful and unpleasant matter.
I really mean Best Wishes.
Best Wishes.
The 21st century has afforded the investor and portfolio researcher alike, the benefit of the use of ETFs that focus on underlying academically based CAPM "factors" and other attributes. Implementing these products within a tactical framework can provide much more flexibility in the goal towards asset accumulation https://docs.google.com/document/d/14OG8dGZolcXg7WGy_vGFN1dTJq1TccfgKwK7x27HAAA/edit?usp=sharing.
The additional innovation of "motif" investing allows users and investors to build managed portfolios that other retail investors can track and invest in; this without the staffing, SEC approval, advertising, legal, etc. involved with the launch of funds and maintenance of running a "brick and mortar" fund enterprise.