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Why Did Each and Every One of my Funds Beat the Index?
I truly cannot understand why all of my funds would beat the index. Could Jack Bogle possibly be wrong? This is a real question. Please help me understand it if you can.
@dryflower: "Okay, it is true that the MFM30 was only put together within the last couple of years, and naturally, funds were selected that had performed above average."
" However, the Moron has continuously owned 10 of these funds over the past 15 years (indicated with an asterisk, and each and every one of them beat the Index. The Moron has no special powers or knowledge. So why was each and every one able to beat the Total Stock Market Index?"
Every time you tell a lie, this happens to your nose !
Ted, I have owned the 10 funds marked with an asterisk for 15+ years. Yes, I suppose I could prove it if I had to. But I'm not trying to brag, just trying to understand.
Ted, I have owned the 10 funds marked with an asterisk for 15+ years. Yes, I suppose I could prove it if I had to. But I'm not trying to brag, just trying to understand.
Are you claiming that you only owned those 10 funds (in equities) the last 15+ years and no other fund you bought/sold during that time?
There are two different questions here, one whether a mutual fund can beat a relevant index over a long period of time and two if you were able to exactly pick only those funds that over performed and nothing else.
The answer to the first question is very simple and easy to verify. There are many funds that beat their indices especially over market cycles. This is from a combination of stock selection and reducing drawdowns. Indices that stay fully invested even during long bear markets have a disadvantage relative to a manager that is able to go defensive and also be aggressive in bull markets. Yactman is a good example of such a manager. However, since that kind of timing cannot be perfect, they will not beat the index every year which is what the indexing studies try to hold them to for their conclusions.
Bogle's statements always have to be taken with some understanding rather than as gospel by the cult. If you have a primarily bull market, it is very difficult for a manager to beat the index over a long period in such a market by stock picking alone. The higher the ER, more difficult. We have had many such periods and therefore when you average it over all such periods and so over representing bull markets, the indexes come out better with a few exceptions. This is a mathematical conclusion based on averages than on what might happen to you.
The second question is whether you or anyone can reliably pick the managers that over perform their indices.
Again, the studies which answer in the negative average over all funds or pick them at random or some such not real world criterion. I suspect that people here with the kind of analysis available to them to select funds will do much better than that but even then it won't be a perfect record. But it doesnt need to be perfect to cone out ahead over a period of time.
No one has studied what would happen if people selected funds based on some due diligence, so that is still an open question as to how different due diligence criterion (not some dumb criterion like recent performance) would portend a successful fund for the future. People who do these studies are usually vested in the indexing approach to ask questions that might potentially disturb that view.
My personal opinion is that this whole beating the index thing is moot. You buy an ndex fund to get full exposure to the market without any drag and is suitable for early years if investing because you can ride out market downturns. As you build up your portfolio and have less years to ride out potential bear markets, you gradually transition to managers that have proven records of capital preservation. I prefer this to traditional beta exposure changes by altering equity/bond mix which lag too much if there aren't significant bear markets.
Are you just posting these as link bait to your blog? There is nothing there that could not have been posted in its entirety as a post here.
I don't know why Ted has gone to form, but I am not understanding your question. Surely you know about normal distributions, outliers from an average (somebody has to outperform, and some do so over long periods), and all that, right? There were many articles 15 years ago touting the 'thus far better' funds; I too own some of these, and have for longer than 15 years, a very few. And some of those continued. Others have fallen. But you picked lucky and also presciently, to some extent and in some meaning of the word prescient --- you say you have no special knowledge, but you do, meaning that you had some sort of knowledge from your reading (these were not dart picks, correct?). So it becomes kind of tautological: these are the winners because they have won thus far. Of course Bogle is wrong in some sense --- where did he or any of those guys ever say that no funds ever outperform indexes, or that there is never a group, even, that does not do so over the long term?? --- but they are not wrong in aggregate, and not on average, and not wrong for (e.g.) the very many on this forum who chase chase chase and trade in and out and sub in and out. Holding is key.
So ... what is your real question? Do you have winners? Sure. Did you luck out? Sure. Does it mean anything other than that you read some finance mfund articles (or headlines) 15 years ago and made some choices that turned out well? Dunno. You probably do not have a Midas touch in the mfund universe.
Everything I point out above would also be true even if these *were* dart picks, btw, and you understand why that is also, yes?
Thanks for you thoughtful responses. I will try to answer your direct questions first.
Are you claiming that you only owned those 10 funds (in equities) the last 15+ years and no other fund you bought/sold during that time?
No. I have purchased several funds, all of which are on the MFM30 list. The only funds I remember selling out of were Putnam Voyager (PVOYX) about 6 years ago and a remnant position in Fidelity Magellan, well over 10 years ago, but probably within the 15 year period.
Are you just posting these as link bait to your blog? There is nothing there that could not have been posted in its entirety as a post here.
I could have cut and pasted the blog post here I suppose. If that is the preferred practice, tell me and I will do so in the future. I wrote to Mr. Snowman about this very issue after Ted bullied me about it, but haven't heard back from him yet. If I did so I would still need to cite the source, just as I would for a blog that was not my own. Let me know. I am accomodating and easy to work with.
So ... what is your real question?
I guess I've read quite a bit of Jack Bogle and I'm trying to figure out why all of the actively managed funds I have owned for 15+ years, in several different fund categories, are all beating VTSMX as well as VDIGX. Am I lucky? Certainly not prescient. And I most definitely do not have an "Midas Touch". (Trust me, when ARGFX declined by about 70% over the course of a year and a half, I did not feel lucky.)
No these were not dart picks, but truly, I think they might as well have been. I bought ARGFX with my wife in mind. It was Calvert Ariel Growth Fund at the time and was heralded as being "sin-free". Since she is sort of a do-gooder I thought she might like that. I bought FRSGX and FRBSX shortly after they were introduced, and it seems like maybe there was some special deal where the load was waived or reduced. Honestly, I don't remember. MUTHX I remember was recommended in a rag called "Mutual Fund Forecaster". A broker sold me on FKINX.
What I am saying is that the purchases were hardly based on any sophisticated analysis. I know a lot more now than I did then, but still don't feel like I know that much.
Also, although all of these funds beat VTSMX, they are certainly not the top picks or top performers. But VTSMX seems to be close to the worst. Why?
Bogle certainly never says that no funds beat the index. What he does say is that those funds are difficult to identify with accuracy in advance. He also claims that there is no evidence that (as a group) funds that have outperformed in the past will outperform in the future.
Mathematically, based on a normalized distribution, I would have expected 3-5 of my 10 funds to beat VTSMX and 3-5 to lose to it. Because of costs I would have thought it more likely that maybe 5-7 of the 10 funds would lose to it.
The result of VTSMX coming in dead last was truly unexpected, and it seems exceedingly unlikely that it was due to mere chance alone. I'm just looking for an explanation.
Another factor I thought of is that this was a period of sharply falling interest rates and any of these funds that contain bonds received a benefit from that whereas VTSMX did not.
>> No these were not dart picks, but truly, I think they might as well have been.
Fine. These choices were not based on reading 1999 financial magazine/online articles. You are profoundly, profoundly lucky to have been in the funds you were in, then, and lucky also not to be in the total market.
But somehow I sense no explanation will suffice for you.
Freud or someone similar pointed out that 'It takes a high degree of sophistication to believe in coincidence.'
If being profoundly lucky is the explanation, then I can accept that. But first I must understand that that is the truth. Are there truly lots and lots of funds that did worse than 5.55% annualized over the past 15 years?
Not sure if you are asking a question to understand or just trying to make a point with gratuitous self-deprecation and feigned moronicity as your site marketing angle.
Why do you think VTSMX is the right index to compare all of those funds? This has nothing to do with anything Bogle has said.
If you picked a small/midcap or value fund by throwing darts, you have a pretty good chance of beating the market cap weighted total market fund which overweights large blend. The premium that small and value brings is well documented. You have to take the category index for each of those to compare.
Some of those funds will still have done well but you cannot draw any conclusion from such a small and single sample space.
Whatever policy the site might have, I would appreciate the post here rather than a link to personal sites. Gives you more credibility as well that you are serious about a discussion rather than self-promotion so we spend the time to respond. This will be the last time I will follow a link to for your site. If you continue to do it, I will assume you are just here for self-promotion. Speaking for myself only here.
Index investing (especially the S&P 500) was in vogue during the decade or so leading up to about 2000. This was in no small part due to Jack Bogle's than popular and highly respected writings and also in part because trends tend to feed on themselves. I suspect even total market indexes can reflect a type of over-bought condition for shorter periods like 10-15 years.
I'd be disappointed if any of my actively managed equity funds hasn't beaten both the S&P and the Wilshire 5000 over the past 15 years, since good managers have flexibility to deviate from the indexes. PRWCX most certainly has. Don't forget also the phenomenal bull market in bonds over that period. Most actively managed equity funds have at least some exposure to fixed income (including bonds), whereas an equity index fund would have none.
None of this disputes that over very long periods (ie 50 years) index funds should/will trump actively managed on average.
We all know that most active funds underperform the index, but I wonder, if you exclude all the sales load, high-expense funds sold by brokers, and if you avoid funds with above-average expenses, and if you avoid all the sector funds created to follow the latest hot trend, perhaps your odds are pretty good, so long as you resist the temptation to sell good funds when they underperform for a year or two.
Looking at dryflower's list and 15 year holding period, I think that's exactly what he/she did. So sure, there was luck that every single fund outperformed (which is why you can go overboard with "the fewer funds the better" mantra), but it was luck that came from first stacking the odds in one's favor. I find it entirely believable.
There ws a lot of criticism/skepticism of another poster, skeet I believe, who also said his baskets/sleeves of funds had outperformed, but looking at his fund list I also found it entirely plausible.
If you have a quarrel, it's not with me. I just don't think it was that extraordinary that whoever's active funds outperformed the indexes the past 15 years. As I suggest above, many equity indexes had been driven to unsustainable highs during the torid 90s. Some was owing to Bogle's widely accepted ideas and some due to momentum investors jumping on the wagon. Now if his/her funds all beat the indexes for another 15 years, we'd like to hear back and I'll join the chorus of cheers. Regards
Thanks. Glad to have your participation - and also no issue with dryflower's post as it elicited a lot of participation. Most such posts will elicit a wide variety of responses - some highly skeptical. No reason for anyone to be offended
Comments
Regards,
Ted
" However, the Moron has continuously owned 10 of these funds over the past 15 years (indicated with an asterisk, and each and every one of them beat the Index. The Moron has no special powers or knowledge. So why was each and every one able to beat the Total Stock Market Index?"
Every time you tell a lie, this happens to your nose !
Pinocchio:
Regards,
Ted
There are two different questions here, one whether a mutual fund can beat a relevant index over a long period of time and two if you were able to exactly pick only those funds that over performed and nothing else.
The answer to the first question is very simple and easy to verify. There are many funds that beat their indices especially over market cycles. This is from a combination of stock selection and reducing drawdowns. Indices that stay fully invested even during long bear markets have a disadvantage relative to a manager that is able to go defensive and also be aggressive in bull markets. Yactman is a good example of such a manager. However, since that kind of timing cannot be perfect, they will not beat the index every year which is what the indexing studies try to hold them to for their conclusions.
Bogle's statements always have to be taken with some understanding rather than as gospel by the cult. If you have a primarily bull market, it is very difficult for a manager to beat the index over a long period in such a market by stock picking alone. The higher the ER, more difficult. We have had many such periods and therefore when you average it over all such periods and so over representing bull markets, the indexes come out better with a few exceptions. This is a mathematical conclusion based on averages than on what might happen to you.
The second question is whether you or anyone can reliably pick the managers that over perform their indices.
Again, the studies which answer in the negative average over all funds or pick them at random or some such not real world criterion. I suspect that people here with the kind of analysis available to them to select funds will do much better than that but even then it won't be a perfect record. But it doesnt need to be perfect to cone out ahead over a period of time.
No one has studied what would happen if people selected funds based on some due diligence, so that is still an open question as to how different due diligence criterion (not some dumb criterion like recent performance) would portend a successful fund for the future. People who do these studies are usually vested in the indexing approach to ask questions that might potentially disturb that view.
My personal opinion is that this whole beating the index thing is moot. You buy an ndex fund to get full exposure to the market without any drag and is suitable for early years if investing because you can ride out market downturns. As you build up your portfolio and have less years to ride out potential bear markets, you gradually transition to managers that have proven records of capital preservation. I prefer this to traditional beta exposure changes by altering equity/bond mix which lag too much if there aren't significant bear markets.
Are you just posting these as link bait to your blog? There is nothing there that could not have been posted in its entirety as a post here.
So ... what is your real question? Do you have winners? Sure. Did you luck out? Sure. Does it mean anything other than that you read some finance mfund articles (or headlines) 15 years ago and made some choices that turned out well? Dunno. You probably do not have a Midas touch in the mfund universe.
Everything I point out above would also be true even if these *were* dart picks, btw, and you understand why that is also, yes?
No. I have purchased several funds, all of which are on the MFM30 list. The only funds I remember selling out of were Putnam Voyager (PVOYX) about 6 years ago and a remnant position in Fidelity Magellan, well over 10 years ago, but probably within the 15 year period. I could have cut and pasted the blog post here I suppose. If that is the preferred practice, tell me and I will do so in the future. I wrote to Mr. Snowman about this very issue after Ted bullied me about it, but haven't heard back from him yet. If I did so I would still need to cite the source, just as I would for a blog that was not my own.
Let me know. I am accomodating and easy to work with. I guess I've read quite a bit of Jack Bogle and I'm trying to figure out why all of the actively managed funds I have owned for 15+ years, in several different fund categories, are all beating VTSMX as well as VDIGX. Am I lucky? Certainly not prescient. And I most definitely do not have an "Midas Touch". (Trust me, when ARGFX declined by about 70% over the course of a year and a half, I did not feel lucky.)
No these were not dart picks, but truly, I think they might as well have been. I bought ARGFX with my wife in mind. It was Calvert Ariel Growth Fund at the time and was heralded as being "sin-free". Since she is sort of a do-gooder I thought she might like that. I bought FRSGX and FRBSX shortly after they were introduced, and it seems like maybe there was some special deal where the load was waived or reduced. Honestly, I don't remember. MUTHX I remember was recommended in a rag called "Mutual Fund Forecaster". A broker sold me on FKINX.
What I am saying is that the purchases were hardly based on any sophisticated analysis. I know a lot more now than I did then, but still don't feel like I know that much.
Also, although all of these funds beat VTSMX, they are certainly not the top picks or top performers. But VTSMX seems to be close to the worst. Why?
Bogle certainly never says that no funds beat the index. What he does say is that those funds are difficult to identify with accuracy in advance. He also claims that there is no evidence that (as a group) funds that have outperformed in the past will outperform in the future.
Mathematically, based on a normalized distribution, I would have expected 3-5 of my 10 funds to beat VTSMX and 3-5 to lose to it. Because of costs I would have thought it more likely that maybe 5-7 of the 10 funds would lose to it.
The result of VTSMX coming in dead last was truly unexpected, and it seems exceedingly unlikely that it was due to mere chance alone. I'm just looking for an explanation.
Another factor I thought of is that this was a period of sharply falling interest rates and any of these funds that contain bonds received a benefit from that whereas VTSMX did not.
Fine. These choices were not based on reading 1999 financial magazine/online articles. You are profoundly, profoundly lucky to have been in the funds you were in, then, and lucky also not to be in the total market.
But somehow I sense no explanation will suffice for you.
Freud or someone similar pointed out that 'It takes a high degree of sophistication to believe in coincidence.'
Why do you think VTSMX is the right index to compare all of those funds? This has nothing to do with anything Bogle has said.
If you picked a small/midcap or value fund by throwing darts, you have a pretty good chance of beating the market cap weighted total market fund which overweights large blend. The premium that small and value brings is well documented. You have to take the category index for each of those to compare.
Some of those funds will still have done well but you cannot draw any conclusion from such a small and single sample space.
Whatever policy the site might have, I would appreciate the post here rather than a link to personal sites. Gives you more credibility as well that you are serious about a discussion rather than self-promotion so we spend the time to respond. This will be the last time I will follow a link to for your site. If you continue to do it, I will assume you are just here for self-promotion. Speaking for myself only here.
depending on what lots and lots means, yes.
I'd be disappointed if any of my actively managed equity funds hasn't beaten both the S&P and the Wilshire 5000 over the past 15 years, since good managers have flexibility to deviate from the indexes. PRWCX most certainly has. Don't forget also the phenomenal bull market in bonds over that period. Most actively managed equity funds have at least some exposure to fixed income (including bonds), whereas an equity index fund would have none.
None of this disputes that over very long periods (ie 50 years) index funds should/will trump actively managed on average.
Looking at dryflower's list and 15 year holding period, I think that's exactly what he/she did. So sure, there was luck that every single fund outperformed (which is why you can go overboard with "the fewer funds the better" mantra), but it was luck that came from first stacking the odds in one's favor. I find it entirely believable.
There ws a lot of criticism/skepticism of another poster, skeet I believe, who also said his baskets/sleeves of funds had outperformed, but looking at his fund list I also found it entirely plausible.
My two cents' worth.
If you have a quarrel, it's not with me. I just don't think it was that extraordinary that whoever's active funds outperformed the indexes the past 15 years. As I suggest above, many equity indexes had been driven to unsustainable highs during the torid 90s. Some was owing to Bogle's widely accepted ideas and some due to momentum investors jumping on the wagon. Now if his/her funds all beat the indexes for another 15 years, we'd like to hear back and I'll join the chorus of cheers. Regards
Thanks. Glad to have your participation - and also no issue with dryflower's post as it elicited a lot of participation. Most such posts will elicit a wide variety of responses - some highly skeptical. No reason for anyone to be offended
(iow, they are in the middle of the pack, right where one might expect them to be)