Vanguard founder John BogleVanguard founder John Bogle.Vanguard:
"These active managers have a real business problem. They are losing money. Vanguard accounts for over 100% of the cash flow in the industry (since 2014). One firm. All the other firms in the industry together are losing money, losing cash flow. Of course they don't like it. I understand that. But it was never my design to build a colossus.
I'm a small-company guy, but I happen to have two great ideas. One is a mutual company, which is focused not on the management company shareholder but on the fund shareholder. That's the structural thing we bring to the table. And the strategic thing we brought to the table was the index fund. We created the first index fund, and it took 20 years before it started to catch on in, the mid-1990s, and now it’s dominating everything we say in this financial field, and it's changing it forever."
Business Insider Link to Interview:
businessinsider.com/vanguard-jack-bogle-401k-active-management-index-investing-2017-1
Comments
"We make too much out of past performance, and it's very misleading to investors. It causes them to move money around. They buy a fund that's hot and then it turns cold as all hot funds eventually do. And then they get out. Well, buying at the high and selling at the low isn't going to leave you a satisfied shareholder ..."
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Maybe there's data somewhere on the average fund holding period today of the average active investor? Some still buy and hold for decades. A few probably never look. But an increasing number will dump a new fund if it hasn't performed well for a few months. Than they'll buy whatever's been hot lately. Strikes me like shopping for a new home or car and buying whichever one's become the most expensive lately.
Blame the fund companies for a lot of this. How many different funds does T. Rowe now offer? (Maybe 75 or something like that - not counting different classes). With the ease of online trading and an itchy trigger-finger one can appreciate how hard it is for many to stay put.
See PRCPX T. Rowe Price Credit Opportunities Fund. Hot dang!
PRCPX might survived if structured as an interval fund. Several bank loan funds started out that way.
Not sure what you mean by average active investor. Do you mean the average investor who invests largely or primarily in active funds? That would be interesting to study.
Or do you mean the average of investors who actively (i.e. frequently) trade? That wouldn't be so interesting, because by definition they're all trading a lot, regardless of what their average is.
Admittedly that would be hard to quantify. In my own case, for example, I have an automatic monthly transfer from bank account to an ultra-short fund. Than I fund several major expenses (by check or EFT) from the ultra-short. Also, I gradually shift anticipated RMDs from various funds to ultra-short - typically in December of the prior year. Counting those types of transactions my own numbers would appear astronomical.
Seems like I may have read something along the line somewhere, however - perhaps based on surveys/studies of investor behavior rather than pulled from fund stats.
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@msf - Thanks for the thoughts here - and for your statistical presentation on the effect of lower bond coupon rates on future bear market returns in the Recession thread. (Seems to have put that matter to rest.
Jack Bogle is a great man. He changed the investment business forever and in so doing he significantly reduced investment costs for all investors. I remember when the entry costs for buying a mutual fund were obnoxious. Yes, for the last 40 or so years, Bogle has sung the same song. But it is a song that has revolutionalized an industry to its very core and deserves repititions.
Index investing now owns roughly 30% of the mutual fund industry market share and is gaining every day. Even a giant agency like the state of California is firing some of their active investment management and replacing them with Index advocates. Returns are likely to improve with that decision as costs are reduced and bad decisions are eliminated.
Index investing will never totally replace active investing management. We need active investors for price discovery purposes. I have seen TV shows that estimated we only need about a 20% to 30% active market players to satisfy that purpose. Indexing still has a long growth potential.
There is reliable data on the average fund holding period for the individual investor. It's about 3 years. Equity fund investors hold their funds for a little over 3 years while bond fund holders are slightly less patient at just under a 3-year average period.
That trading frequency generates sad outcomes for the average fund holder since his return is only about 1/2 of what the fund he invests in earns. Women do better with their investment decisions than their male counterparts.
Here is a Link to the DALBAR site that has a ton of investor data:
https://www.qaib.com/public/qaibquarterly
I suspect most MFOers do not subscribe to the DALBAR service for access. So here is a Link to a brief summary of the DALBAR data designed to encourage a sale of their service:
http://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/DALBAR Pinpoints Investor Pain 2015.pdf
This DALBAR summary tells the sad tale without comment. Here is another Link that interprets these same investor data sets:
https://blog.folioinvesting.com/2012/05/11/the-most-common-mistake-investors-make/
Enjoy. I hope many MFOers are among the more patient investors. Trading frequently is indeed hazardous to our wealth.
Best Wishes.
Additional Input: I referenced the DALBAR research without providing an accessible Link. I just discovered a Link that does yield an example of the DALBAR work. Here is that Link:
https://www.bellmontsecurities.com.au/wp-content/uploads/2015/04/2015-DALBAR-QAIB-study.pdf
I have not read their report in detail, but it appears to support the observation that individual investors suck on average. Of course, no MFOers are average!
Maybe food for future thought.http://www.safalniveshak.com/wp-content/uploads/2012/07/Why-Do-Investors-Trade-Too-Much.pdf
Caution: It appears this study is based (at least in part) on investors in Taiwan: "(We) have analyzed the account records of thousands of investors. Our analyses have used data from discount and retail brokerage firms in the U.S. We have also analyzed the trading records of all investors in Taiwan.
(Dick Strong set the trading bar pretty high for the rest of us in his day.
Re: "Jack Bogle is a great man."
Bogle, as you say, changed the fund industry fundamentally. But I try not to put anyone up on a pedestal. Bogle, like most, has his share of detractors.
In the financial world Bogle looms great - but among many other greats who've made huge contributions. There I go nit-picking again!
Thanks for responding to my post.
My reference to Bogle was just my casual introduction to the topic. But it is my humble opinion that Bogle is indeed a great man. And it is simply an opinion. My criteria are likely different from others, and all are equally valued. In the USA we have been blessed with many, many great men and women.
I suppose much depends on how we define a great man. I like Bob Marley's definition: "The greatness of a man is not in how much wealth he acquires, but in his integrity and his ability to affect those around him positively." I believe John Bogle perfectly satisfies that definition. Just my opinion.
The main purpose of my post was to address your question about individual investor's fund holding periods. DALBAR explores that issue in considerable depth. I hope my references adequately answered your questions.
Best Wishes.
For example, they present the odds of picking a big eight winner as 4.1% and the odds of holding only losers as 9.6%. What they don't tell you is how much you would win or lose in each case. If I were to tell you that those were the odds, but in the first case you'd win $1000 and in the second case you'd lose $20, I think you'd be happy to play that game. It's expectation values that matter, not raw odds. By citing the latter, they are appealing to incorrect intuitions.
That's why it's important to go to the paper, which I've only briefly skimmed. You'll find their definition of monthly turnover on p. 779 (pdf p. 7). It's similar but not identical to the way funds (or at least M*) define fund portfolio turnover. Doesn't matter too much - your intuition is likely pretty close here. Yes, Dick Strong certainly set a high bar - 700%+.
From my limited exposure to Taiwan investing (talking with people when I visit), it does feel like there's more trading going on there. Sort of like Silicon Valley, where people in startups keep tabs on their options and company price.
@MJG - Zero entry cost (no load) mutual funds have been around since 1928. On p. 22 of Kiplinger's Changing Times, June 1960, you'll find a list of eight large no load funds along with an offer to get a list of a dozen smaller no loads if you'll send a dime to them. The page does note that "the only way to find a no-load fund like this is to dig into the records yourself." Entry costs were never obnoxious in your lifetime, if one knew where to look. My father owned one of the funds on the Kiplinger page which he gifted to me (UGMA) many years later.
Dalbar keeps talking about the average investor when what it is actually talking about is the average investment dollar. Sharpe doesn't make this error when writing about how the average dollar will underperform the market by the overhead of investing, no more, no less. Which is why it isn't index vs. active that matters, but the cost of ownership. A cheap, actively managed Vanguard fund will do just fine.
funds-newsletter.com/feb17-newsletter/feb17-new.htm
Jack, please change your mind quickly. You are sticking a fork in my plans.