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.
Support MFO
Donate through PayPal
Scott Burns: Couch Potato Investing Trumps “Expert” Investing, Once More
One Day your going to arrive at the airport, to be greeted by guys like Scott Burns, dress in a white rob and banging a tambourine,no shoes or hair...asking you if you would like to convert all your investments to index funds, "you will do much better than trying yourself, your not that smart"......John Boggle will give you all the paper work, lets get started...... Please sing a different song...I think everyone who needs it has the message... in my opinion,tb
I read this article in our local paper as well this morning. It takes very little effort to find moderate allocation funds that easily outperform the couch potato portfolio of index funds. Our two primary moderate allocation funds (PRWCX & FPACX) do and it is not really all that close.
ROY...Nice work but your fighting a religion...disciples..I thing they call themselves, I call them irritating, but believe me you will see this "stuff" repeated constantly
Thanks for your brief list of current superior Balanced mutual funds. Fortunately, I have owned two of them for over two decades. Given my meager financial knowledge at my entry date, I was more lucky and less skilled when making those decisions.
Your survey demonstrates that superior (defined as generating positive excess returns) active fund managers exist, although numerous global studies such as the semi-annual S&P Persistence Scorecards strongly conclude that the persistency numbers are fewer than would be statistically expected. There are exceptions for a subset of investment categories.
Three issues came to mind while reviewing your list: (1) hindsight bias, (2) benchmark selection, and (3) data clutter. Allow me to expand on these elements sequentially.
I’m sure the list you posted was not assembled randomly; it was generated with returns as the primary sorting mechanism. Investors typically use past returns as their number one ordering criterion. But that’s based solely on ephemeral past performance. It is an excellent candidate for a creeping Hindsight bias. The real test is how well this list performs over the next extended timeframe. Studies of this issue paint a dark picture.
Many studies conclude that a returns approach is just too simple; Alpha (excess returns) persistence is an unreliable fund trait. Additional fund attributes such as low holdings turnover rate, low fee structure, long-term manager tenure, policy stability, and low Price/Earning ratio positions are likely to enhance the odds of positive Alpha retention.
Your selected 50/50 mixed benchmark is reasonable, but not quite correct for the funds listed. The basic policy for my two funds in that list do not practice a 50/50 asset allocation; both those funds deploy a nominal 60/40 mix standard philosophy. Any meaningful comparison with an Index benchmark should properly reflect a precise asset allocation distribution.
Finally, given that short-term outcomes are mostly noise that should be minimally weighted, comparisons of YTD, 1 year, and 3 year results are not as definitive as results recorded over the longer timeframes. The more recent data is clutter. I actually prefer 10 year and longer performance data since these are more likely to capture full cycle performance, both good years and bad years.
Active fund managers are hardly ever made to pay for their investment engineering missteps. That’s too bad since that failure to account for mistakes goes against ancient traditions such as Hammurabi’s Code of Laws.
In those ancient days, if a house wall failed or a dam broke and flooded a field, the builder was required to make restitution. In Roman times the builder of an arched, elevated roadway was required to stand under it when the first load crossed it. Today’s fund managers do not face that test of fire. That’s too bad.
Thanks again for your submittal, but an investor must be constantly alert to the huge empirical mutual fund performance gap between past and future results. Always remember the strong regression-to-the-mean pull that exists in the investment marketplace.
"Today’s fund managers do not face that test of fire. That’s too bad."
I disagree.... watch the withdraw rates of underperforming funds,next managers face severe loss of income with decrease of holdings, next they face loss of position with large firms or loss of their business with small or owned funds, ( hundreds every year) They get paid TODAY for their underperformance...but the end is near...as it should be. What constantly amazes is how some investors can stay with them and lose money? not necessary.....but they (investors) get what the deserve....
The funds I chose for the comparison were based on the fact that I have held two of them for nearly a decade and in combination with the others listed comprise many of the most widely held no-load moderate allocation/balanced funds. I used moderate allocation funds because that is the category that Mr. Burns was comparing his Couch Potato portfolio too without accounting for the difference in equity allocation among the funds in that category which generally ranges from 50-70%.
There are certainly many, many moderate allocation funds (probably a majority) that come up short verses the Couch Potato portfolio no matter their equity allocation. My main point was to show there are a number of actively managed moderate allocation funds that have both been around for many years and have consistently performed very well in comparison to the Couch Potato portfolio that utilizes low cost index funds.
For investors who desire a moderate allocation portfolio who do not desire to put in the effort to identify funds that have a history of doing better or are not available through workplace retirement plans, a couch potato portfolio is certainly a good option...not arguing that in the least bit.
For investors who desire a moderate allocation portfolio who do not desire to put in the effort to identify funds that have a history of doing better.......
Does investing in funds that have a history of doing better result in a portfolio that performs better in the future?
John Bogle is fond of saying that "past is not prologue"
And MJG has frequently posted about the lack of persistence in mutual fund performance, in other words, invest in a list of the best performers over the past 10 years, and it is not likely they will be in the list of best performers for the coming 10 years.
Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."
Barra Research: "There is no persistence of equity fund performance."
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.
Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."
Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."
Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."
Prof. John Cochrane, author: "Past performance has almost no information about future performance."
S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"
Jonathan Clements, author & Wall Street Journal columnist: "Trying to pick market-beating investments is a loser's game."
Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."
Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."
Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.
Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."
Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."
Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."
After fifteen straight years beating the S&P 500 Index, Bill Miller's Legg Mason Value Trust (LMNVX) is now (1/25/2015) in the bottom 1% of its category for 10-year returns .
Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."
Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."
David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."
Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."
Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."
Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years. +++++++++++
along with MJG, I also hold actively managed funds. But I think one thing that needs to be talked about much more is the tax implications (the drop in performance) of all the taxable distributions that actively managed funds tend to make.
The Vanguard Total Stock Market Index fund and the Vanguard S&P 500 Index fund have not had a single capital gains distribution in more than 10 years. The only taxes you pay are on qualified dividends. This is a HUGE issue.
In the typical performance figures we see before tax returns. Would be interesting to see after tax returns, given a specified tax bracket. As we all know, you only keep the after tax returns.
Thank you all for the respectful commentary. It surely expanded the scope of the discussion in a positive way.
Funds are being born and buried in an increasingly frantic manner each year. It's getting harder to keep pace and MFO is helpful along those lines. In the golden older days, funds were born to survive; these days it seems as if funds are born to be buried after a short and problematic life. Fund failure rates have increased by large multiples over the decades while draining investor resources during their brief period in the sun. It seems as if fees rather than outstanding performance and/or risk control was the primary incentive.
I participate on the MFO Discussion section mostly because it serves to limit this damage directed at novice investors.
Added VBINX to the moderate allocation funds I had listed instead of the couch potato portfolio as VBINX equity to fixed income ratio is ~60/40...closer to the other funds listed.
Am I understanding correctly that both of you use a combination of actively managed funds as well as index funds? I've considered the merits of such a strategy in the past and am aware individuals such as Charles Schwab are advocates of the combination.
I was under the impression that most people invested in a mix of index and active-managed funds. I think that is true the longer you invest. Anyone wanting to invest in certain areas like emerging markets for example didn't have a index type investment to pick until recently.
Yes, my portfolio is a mix of passive and actively managed funds.
About a decade ago my portfolio was 100 % actively managed funds and individual stocks. Today, I own zero stocks and roughly 35 % is with active products. My plan is to reduce that commitment to a floor of about 20 % as I continue to reduce my portfolio management schedule. I suspect this is a very common investment trajectory that is strongly influenced by an experience and learning process.
There was a recent thread on how much index vs. managed funds many "Bogleheads" have. I was surprised to see that even among the purists, most still have some active funds in their portfolios. https://www.bogleheads.org/forum/viewtopic.php?t=151405&f=10
@rjb112: "In the typical performance figures we see before tax returns. Would be interesting to see after tax returns, given a specified tax bracket. As we all know, you only keep the after tax returns."
I think that's a really great subject for our more mathematically gifted contributors to take apart. I'd really be interested to see some hard factual data/conclusions on that one.
Am I understanding correctly that both of you use a combination of actively managed funds as well as index funds? I've considered the merits of such a strategy in the past and am aware individuals such as Charles Schwab are advocates of the combination.
Hi Roy, Yes, you are correct. I use a combination of actively managed funds as well as index funds. And like MJG, as time goes on, my percentage of indexed equity investments has been increasing and my percentage of actively managed equity investments has been decreasing.
And I plan to continue this, that is, use an increasingly larger percentage of indexed equity funds rather than actively managed equity funds. I'm particularly disenchanted with the negative tax implications of actively managed equity funds, that is to say, the fact that they distribute taxable capital gains.
And I'm increasingly overjoyed that the Vanguard Total Stock Market Index fund and Vanguard S&P 500 Index funds have not distributed any capital gains in over 10 years, and I only have to pay taxes on qualified dividends.
Last year was particularly distressing with respect to the large amount of taxable distributions from the actively managed equity funds (capital gains distributions........I'm not distressed by dividends, as if a company wants to pay dividends, that's great). To add insult to injury, on top of the generally large amount of taxable capital gains distributions from the actively managed stock funds, they generally underperformed the indexes by a significant amount. If you are going to distribute taxable capital gains to shareholders, at least outperform the indexes.
MJG has been partly instrumental in helping to change my thinking. I have read literally dozens of his posts where he has shown that skill is increasingly difficult to demonstrate in active fund managers, and luck often explains things when they do outperform the market.
I think Jack Bogle was 40 years ahead of his time. They called his S&P 500 index fund, which opened in 1976, "Bogle's Folly". No one wanted an "average" performance. Everyone wanted to pick funds that beat the market. But obviously all funds cannot beat the market, and after fund expenses, some of which show up in the expense ratio and some of which do not (such as brokerage fees, losses due to bid-ask spreads, losses due to the fund itself affecting the market price of the stock, etc), the vast majority do not.
And Bogle once speculated that taxes alone possibly subtracted about 2% per year from the returns on actively managed mutual funds versus index funds. I don't have a follow up on that, or data to know the true figure.
It's difficult to pick actively managed funds that are going to beat their respective index funds, in advance. It's very easy to pick them after the fact, retrospectively!! Even the pros can't do it well. And even equity mutual fund managers cannot do a good job picking funds that will beat their respective indexes.
Even Morningstar can't do it, in my opinion. Morningstar has a newsletter that may be called something like "Morningstar Fund Investor", and they have model portfolios. They have not beaten their respective indexes, and that newsletter is written by probably the top fund picker at Morningstar. He can't beat the market by choosing a portfolio of actively managed stock funds.
Anyway, yes, I own both actively managed and indexed equity funds, but am generally disenchanted with active management, primarily due to the fees involved. If there were no fees to actively managed funds, they would beat their respective indexes. Expenses are the reason they underperform as a group. It's not that the managers don't know what they are doing.......it's the fees involved, the expense ratio plus the other fees not found in the expense ratios.
I'm going to reinstitute the 40 word rule(MFO)....Life is short and so is my attention Old Salesman rule, you have 15 seconds to get a prospects attention/interest.....its true..
Comments
Please sing a different song...I think everyone who needs it has the message... in my opinion,tb
Regards,
Ted
As of 2/13/15, 1 yr, 3 yr, 5 yr, 10 yr returns
Couch Potato 8.88, 8.92, 10.36, 6.195 -50% VTSMX & 50% VIPSX
PRWCX 13.8, 14.99, 13.91, 8.91
FPACX 7.77, 11.46, 10.86, 8.41
VWELX 11.59, 12.7, 12.09, 8.06
DODBX 9.97, 15.58, 13.36, 6.85
OAKBX 10.19, 11.66, 10.29, 8.17
Proof that lower expense ratios alone do not necessarily guarantee better performance.
I call them irritating, but believe me you will see this "stuff" repeated constantly
Thanks for your brief list of current superior Balanced mutual funds. Fortunately, I have owned two of them for over two decades. Given my meager financial knowledge at my entry date, I was more lucky and less skilled when making those decisions.
Your survey demonstrates that superior (defined as generating positive excess returns) active fund managers exist, although numerous global studies such as the semi-annual S&P Persistence Scorecards strongly conclude that the persistency numbers are fewer than would be statistically expected. There are exceptions for a subset of investment categories.
Three issues came to mind while reviewing your list: (1) hindsight bias, (2) benchmark selection, and (3) data clutter. Allow me to expand on these elements sequentially.
I’m sure the list you posted was not assembled randomly; it was generated with returns as the primary sorting mechanism. Investors typically use past returns as their number one ordering criterion. But that’s based solely on ephemeral past performance. It is an excellent candidate for a creeping Hindsight bias. The real test is how well this list performs over the next extended timeframe. Studies of this issue paint a dark picture.
Many studies conclude that a returns approach is just too simple; Alpha (excess returns) persistence is an unreliable fund trait. Additional fund attributes such as low holdings turnover rate, low fee structure, long-term manager tenure, policy stability, and low Price/Earning ratio positions are likely to enhance the odds of positive Alpha retention.
Your selected 50/50 mixed benchmark is reasonable, but not quite correct for the funds listed. The basic policy for my two funds in that list do not practice a 50/50 asset allocation; both those funds deploy a nominal 60/40 mix standard philosophy. Any meaningful comparison with an Index benchmark should properly reflect a precise asset allocation distribution.
Finally, given that short-term outcomes are mostly noise that should be minimally weighted, comparisons of YTD, 1 year, and 3 year results are not as definitive as results recorded over the longer timeframes. The more recent data is clutter. I actually prefer 10 year and longer performance data since these are more likely to capture full cycle performance, both good years and bad years.
Active fund managers are hardly ever made to pay for their investment engineering missteps. That’s too bad since that failure to account for mistakes goes against ancient traditions such as Hammurabi’s Code of Laws.
In those ancient days, if a house wall failed or a dam broke and flooded a field, the builder was required to make restitution. In Roman times the builder of an arched, elevated roadway was required to stand under it when the first load crossed it. Today’s fund managers do not face that test of fire. That’s too bad.
Thanks again for your submittal, but an investor must be constantly alert to the huge empirical mutual fund performance gap between past and future results. Always remember the strong regression-to-the-mean pull that exists in the investment marketplace.
Best Wishes.
I disagree.... watch the withdraw rates of underperforming funds,next managers face severe loss of income with decrease of holdings, next they face loss of position with large firms or loss of their business with small or owned funds, ( hundreds every year)
They get paid TODAY for their underperformance...but the end is near...as it should be.
What constantly amazes is how some investors can stay with them and lose money?
not necessary.....but they (investors) get what the deserve....
I appreciate your insightful post.
The funds I chose for the comparison were based on the fact that I have held two of them for nearly a decade and in combination with the others listed comprise many of the most widely held no-load moderate allocation/balanced funds. I used moderate allocation funds because that is the category that Mr. Burns was comparing his Couch Potato portfolio too without accounting for the difference in equity allocation among the funds in that category which generally ranges from 50-70%.
There are certainly many, many moderate allocation funds (probably a majority) that come up short verses the Couch Potato portfolio no matter their equity allocation. My main point was to show there are a number of actively managed moderate allocation funds that have both been around for many years and have consistently performed very well in comparison to the Couch Potato portfolio that utilizes low cost index funds.
For investors who desire a moderate allocation portfolio who do not desire to put in the effort to identify funds that have a history of doing better or are not available through workplace retirement plans, a couch potato portfolio is certainly a good option...not arguing that in the least bit.
Regards.
John Bogle is fond of saying that "past is not prologue"
And MJG has frequently posted about the lack of persistence in mutual fund performance, in other words, invest in a list of the best performers over the past 10 years, and it is not likely they will be in the list of best performers for the coming 10 years.
https://www.bogleheads.org/forum/viewtopic.php?uid=50214&f=10&t=156573&start=0
What Experts Say About "Past Performance"
Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."
Barra Research: "There is no persistence of equity fund performance."
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.
Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."
Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."
Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."
Prof. John Cochrane, author: "Past performance has almost no information about future performance."
S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"
Jonathan Clements, author & Wall Street Journal columnist: "Trying to pick market-beating investments is a loser's game."
Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."
Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."
Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.
Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."
Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."
Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."
After fifteen straight years beating the S&P 500 Index, Bill Miller's Legg Mason Value Trust (LMNVX) is now (1/25/2015) in the bottom 1% of its category for 10-year returns .
Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."
Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."
David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."
Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."
Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."
Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.
+++++++++++
along with MJG, I also hold actively managed funds. But I think one thing that needs to be talked about much more is the tax implications (the drop in performance) of all the taxable distributions that actively managed funds tend to make.
The Vanguard Total Stock Market Index fund and the Vanguard S&P 500 Index fund have not had a single capital gains distribution in more than 10 years. The only taxes you pay are on qualified dividends. This is a HUGE issue.
In the typical performance figures we see before tax returns. Would be interesting to see after tax returns, given a specified tax bracket. As we all know, you only keep the after tax returns.
Thank you all for the respectful commentary. It surely expanded the scope of the discussion in a positive way.
Funds are being born and buried in an increasingly frantic manner each year. It's getting harder to keep pace and MFO is helpful along those lines. In the golden older days, funds were born to survive; these days it seems as if funds are born to be buried after a short and problematic life. Fund failure rates have increased by large multiples over the decades while draining investor resources during their brief period in the sun. It seems as if fees rather than outstanding performance and/or risk control was the primary incentive.
I participate on the MFO Discussion section mostly because it serves to limit this damage directed at novice investors.
Best Wishes.
As of 2/13/15, 1 yr, 3 yr, 5 yr, 10 yr returns
VBINX 11.29, 11.66, 11.84, 7.12
PRWCX 13.8, 14.99, 13.91, 8.91
FPACX 7.77, 11.46, 10.86, 8.41
VWELX 11.59, 12.7, 12.09, 8.06
DODBX 9.97, 15.58, 13.36, 6.85
OAKBX 10.19, 11.66, 10.29, 8.17
MJG & rjb,
Am I understanding correctly that both of you use a combination of actively managed funds as well as index funds? I've considered the merits of such a strategy in the past and am aware individuals such as Charles Schwab are advocates of the combination.
Yes, my portfolio is a mix of passive and actively managed funds.
About a decade ago my portfolio was 100 % actively managed funds and individual stocks. Today, I own zero stocks and roughly 35 % is with active products. My plan is to reduce that commitment to a floor of about 20 % as I continue to reduce my portfolio management schedule. I suspect this is a very common investment trajectory that is strongly influenced by an experience and learning process.
Best Wishes.
I think that's a really great subject for our more mathematically gifted contributors to take apart. I'd really be interested to see some hard factual data/conclusions on that one.
(Edited to correct spelling error.)
Yes, you are correct. I use a combination of actively managed funds as well as index funds. And like MJG, as time goes on, my percentage of indexed equity investments has been increasing and my percentage of actively managed equity investments has been decreasing.
And I plan to continue this, that is, use an increasingly larger percentage of indexed equity funds rather than actively managed equity funds. I'm particularly disenchanted with the negative tax implications of actively managed equity funds, that is to say, the fact that they distribute taxable capital gains.
And I'm increasingly overjoyed that the Vanguard Total Stock Market Index fund and Vanguard S&P 500 Index funds have not distributed any capital gains in over 10 years, and I only have to pay taxes on qualified dividends.
Last year was particularly distressing with respect to the large amount of taxable distributions from the actively managed equity funds (capital gains distributions........I'm not distressed by dividends, as if a company wants to pay dividends, that's great). To add insult to injury, on top of the generally large amount of taxable capital gains distributions from the actively managed stock funds, they generally underperformed the indexes by a significant amount. If you are going to distribute taxable capital gains to shareholders, at least outperform the indexes.
MJG has been partly instrumental in helping to change my thinking. I have read literally dozens of his posts where he has shown that skill is increasingly difficult to demonstrate in active fund managers, and luck often explains things when they do outperform the market.
I think Jack Bogle was 40 years ahead of his time. They called his S&P 500 index fund, which opened in 1976, "Bogle's Folly". No one wanted an "average" performance. Everyone wanted to pick funds that beat the market. But obviously all funds cannot beat the market, and after fund expenses, some of which show up in the expense ratio and some of which do not (such as brokerage fees, losses due to bid-ask spreads, losses due to the fund itself affecting the market price of the stock, etc), the vast majority do not.
And Bogle once speculated that taxes alone possibly subtracted about 2% per year from the returns on actively managed mutual funds versus index funds. I don't have a follow up on that, or data to know the true figure.
It's difficult to pick actively managed funds that are going to beat their respective index funds, in advance. It's very easy to pick them after the fact, retrospectively!! Even the pros can't do it well. And even equity mutual fund managers cannot do a good job picking funds that will beat their respective indexes.
Even Morningstar can't do it, in my opinion. Morningstar has a newsletter that may be called something like "Morningstar Fund Investor", and they have model portfolios. They have not beaten their respective indexes, and that newsletter is written by probably the top fund picker at Morningstar. He can't beat the market by choosing a portfolio of actively managed stock funds.
Anyway, yes, I own both actively managed and indexed equity funds, but am generally disenchanted with active management, primarily due to the fees involved. If there were no fees to actively managed funds, they would beat their respective indexes. Expenses are the reason they underperform as a group. It's not that the managers don't know what they are doing.......it's the fees involved, the expense ratio plus the other fees not found in the expense ratios.
take care Roy,
Happy Investing
Old Salesman rule, you have 15 seconds to get a prospects attention/interest.....its true..