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A lot of employees with 401k etc plans are looking at their gains and comparing to the indexes. Most are woefully underinvested in stocks so they are making changes. Chasing returns might be more accurate.
How do we compare the Two Types of (mutual fund) Investing? let me count the ways... For something "new" to the subject...lets add "safety", wouldn't that make a nice article? NO!....Not really..pointless tribble.....in my humble opinion
The central theme of the referenced article emphasizes a false choice. When assembling a portfolio, it is never, or more appropriately never should be, a toggle switch either/or singular decision.
Most folks accept that diversification is the key to a reasonable portfolio that will generate respectable returns. As many market wizards have highlighted, diversification may be the only free lunch on Wall Street.
For many investors that diversified portfolio is filled with both Index products and actively managed holdings, all contributing in different ways. The spectrum of options is wide and frequently exploited by informed investors.
Certainly owning a single stock or a single mutual fund is a risky proposition. With a single position, rewards are potentially magnified, but so are painful loss possibilities. There are no free lunches here. Many investors abandon ship because of unacceptable portfolio volatility. Multiple asset class holdings act to dampen that volatility, and thus encourage longer holding periods. This enables compound interest to work its magic.
Besides the emotional harm that portfolio volatility promotes, it also has a real damaging impact on compound return over the years. It is a spoiler to end wealth.
Recall that compound return is reduced below annual return levels by the square of the portfolio’s standard deviation (one measure of volatility). A simple algebraic equation captures that degradation. So a portfolio’s long term return is enhanced when the portfolio is constructed in a way to minimize its overall standard deviation.
You can test the validity of this statement by exploring possibilities for your portfolio on the Portfolio Visualizer website. Here is a Link to that excellent tool:
I encourage you to explore various options and outcomes historically by running various “what-if” scenarios. The toolkit is easy to use. Compare your positions against an equivalent all Index portfolio or against an all actively managed portfolio. The tool handles both individual stocks and mutual funds. You can select your historical timeframe for comparative purposes. Have some fun and perhaps even profit from the exercise.
In my own situation, I have a mix of Index funds, ETFs, and actively managed mutual funds. That mix has served me well; it has changed over time. I especially use Index products as my default option when I find no compelling actively managed products.
Safety has different meanings for different folks. Nowhere is it written in stone that it is an either/or, digital Zero or One, world. It is not!
Reading thru all that, "I always use VTSMX as my Bogey, I beat that fund I am shooting Par or better"....17 words on how to compare index vs. active funds...no tribble
Comments
SAFE ???
Neither ! Depends upon when one buys and one sells.
February of 2009 would be a good gauge of values, eh?
For something "new" to the subject...lets add "safety", wouldn't that make a nice article?
NO!....Not really..pointless tribble.....in my humble opinion
The central theme of the referenced article emphasizes a false choice. When assembling a portfolio, it is never, or more appropriately never should be, a toggle switch either/or singular decision.
Most folks accept that diversification is the key to a reasonable portfolio that will generate respectable returns. As many market wizards have highlighted, diversification may be the only free lunch on Wall Street.
For many investors that diversified portfolio is filled with both Index products and actively managed holdings, all contributing in different ways. The spectrum of options is wide and frequently exploited by informed investors.
Certainly owning a single stock or a single mutual fund is a risky proposition. With a single position, rewards are potentially magnified, but so are painful loss possibilities. There are no free lunches here. Many investors abandon ship because of unacceptable portfolio volatility. Multiple asset class holdings act to dampen that volatility, and thus encourage longer holding periods. This enables compound interest to work its magic.
Besides the emotional harm that portfolio volatility promotes, it also has a real damaging impact on compound return over the years. It is a spoiler to end wealth.
Recall that compound return is reduced below annual return levels by the square of the portfolio’s standard deviation (one measure of volatility). A simple algebraic equation captures that degradation. So a portfolio’s long term return is enhanced when the portfolio is constructed in a way to minimize its overall standard deviation.
You can test the validity of this statement by exploring possibilities for your portfolio on the Portfolio Visualizer website. Here is a Link to that excellent tool:
http://www.portfoliovisualizer.com/
I encourage you to explore various options and outcomes historically by running various “what-if” scenarios. The toolkit is easy to use. Compare your positions against an equivalent all Index portfolio or against an all actively managed portfolio. The tool handles both individual stocks and mutual funds. You can select your historical timeframe for comparative purposes. Have some fun and perhaps even profit from the exercise.
In my own situation, I have a mix of Index funds, ETFs, and actively managed mutual funds. That mix has served me well; it has changed over time. I especially use Index products as my default option when I find no compelling actively managed products.
Safety has different meanings for different folks. Nowhere is it written in stone that it is an either/or, digital Zero or One, world. It is not!
Best Regards.