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.
Reply to @Crash: A little history on the excellent Mairs & Power Funds. It was in the early 1990's when their funds were available in only about twelve states, and one their principle stock holdings was a little meat packing company in Austin Minnesota by the name of Hormel, the makers of SPAM. Regards, Ted http://www.mairsandpower.com/index.php?option=com_content&view=article&id=68&Itemid=69
Honestly, I don't see myself spending a whole lot of time actively managing my portfolio. Ideally re-balancing/reallocating 2-3 times a year is what I am looking for. So my thought was to pick a diversified portfolio that I can set on cruise mode for the next 3-4 months and see.
If you don't see any irony/contradiction in what you wrote above, you have come to the right place to feed your addiction and itchy fingers.
If you want to be actively involved in potential re-allocation every 3-4 months or so (which is a perfectly valid investing strategy), you need different tools (for exit and entry Into funds) than latest fund recommendations and performance. Otherwise, you will be a fund collector not an investor who will soon resemble the person with 28 cats in the house.
This site should come with a big warning sign that fund recommendations here may damage your financial health unless used as part of a responsible and well-designed portfolio management technique.
Sorry for my late reply, but I am not an active daily participant any longer. It’s not that the quality and sagacity of the investment exchanges have deteriorated; in reality the reverse is true. It is simply that I have morphed into a more passive investor and treasure the freedom from a heavy commitment to investment study, planning, and execution.
In that regard I hardily endorse the insights and recommendations proposed by MFOer Cman. He is precisely on-target with his current posting.
Active investing does offer its’ positive rewards, but they are hard to realize in practice. And the price for that speculative reward is a demanding time commitment. I particularly liked Cman’s cost/benefit analysis. Market returns are rather easily gained with an Index heavy portfolio. It is a portfolio’s excess returns (its Alpha), that must be measured against the time expenditure.
Historical data, when coupled to academic and industry studies, demonstrate that excess returns are often negative for an actively managed portfolio. In the rare instances when Alpha is positive, it is meager (perhaps a few percent), it is elusive, it is highly transient, and is subject to the most powerful law in the investment world, a reversion-to-the-mean pull. Odds are stiffly against consistent positive Alpha.
It took me a long time to learn that simple lesson. As a personal anecdote, I started investing in stocks in the 1950s. By the mid-1980s I converted to actively managed mutual funds. Today, my portfolio is about a 50/50 mix of active and passive mutual funds and ETFs. I am a slow learner. I plan to end with a 20/80 active/passive allocation in the near future. I like the excitement and challenge of active management just a little, and there are some investment categories that active management can profitably exploit with their selective skill sets.
I recommend you consider shortstopping my long learning experience by moving more directly into passively managed products.
Here is a Link to a recent WSJ article by Joe Light that supports my recommendation:
Mr. Light references an impressive Monte Carlo-based simulation study completed by Rick Ferri and company. Understand that Ferri is a passive Index proponent and an aggressive writer supporting that position. He is definitely a biased advocator. But his work is a useful resource when making any first-order investment decisions such as I’m now recommending to you.
Please take the necessary time to access this fine analytical series. Professor Snowball’s first two investment rules are necessary prerequisites when planning any financial matters. Here is the Link to Ferri’s extensive White Paper on the topic
Reading the White Paper does require a little patience, but it is well worth the effort. In its 25 pages, it emphasizes the advantage of a long-term time horizon and lays waste to the claim that multiple active managers enhance the prospects of excess rewards. His graphs vividly illustrate the asymmetric nature of active fund management returns: The negative outcomes far outweigh the positive outcomes.
The odds are stacked against the active manager. It is not that the active manager is not skilled at stock selection. He is. It is more likely caused by the management fee drag, the drain of active trading costs, and the improved competition from other very smart active managers and their well financed and talented organizations. It’s tough to win on this playing field.
Please read the Ferri paper. On a positive note, the paper’s Monte Carlo simulations do show a very low probability of perhaps a 2 % excess return outlook. Good luck on achieving that highly unlikely excess return. The risk exceeds the unlikely reward by a substantial margin.
Is that unlikely reward worth the effort? My answer is a firm “No”. There is an easy route to capturing market returns by assembling an Index dominated portfolio. Paul Farrell has endorsed that approach for decades. It’s called the Lazy-Man Portfolios. Here’s the Link that summarizes 8 such portfolios cobbled together by highly respected financial wizards:
You might want to consider these portfolios as viable options to an actively managed portfolio such as you presently own. A Lazy-Man option is surely attractive from a time saver perspective, and more likely will enhance your end wealth.
Please give it a few hours or days of open-minded and fair reflection. I wish you success in whatever decision you make. Remember, that decision need not be 100 % in one direction, and it is always open for revision. A Zebra can change its stripes in the investment universe.
I realize this is “old stuff” for veteran MFO members, but I believe you might find this review helpful. Sorry if I bored the loyal MFO contingent who are more actively motivated investors. I wish you guys success also.
Reply to @hank: tp2006 mentioned he had a lump sum of 50K, if that's the case he should put it all in now. " Einstein called compounded returns one of the wonders of the world. He should have added dollar cost averaging to that list". I'm not so sure about DCA, if its a 401(k) monthly investment OK, but remember lump sum always wins. Regards, Ted https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
Reply to @MJG: Thanks for the post and the links. Will definitely give a read! As they say life is too short to learn everything from experience...so better learn from others experience...
From a quick look at the lazy portfolios..they all are Vanguard based as expected...I'll have to look up for similar funds/ETFs at Schwab/Fidelity...
Reply to @Ted: Thanks for the link. Had the same thought - should I go all in now with the sum I have or do DCA with that - esp with the markets acting up the last two days? I also have monthly IRA money coming in as well which I will do DCA with.
Based upon tp2006's active managed fund list that he posted and what he has also noted elsewhere in this thread about allocation percentages into various sectors; I am surprised that you have not offered an index/etf selection to fulfill a passive strategy.
You noted: "If you are prone to investing like collecting wine or toy trains and it is the hobby aspect of it that excites you, you have come to the right place. Soon you will be talking about your cellar selection and the difference between 2005 and 2010 bordeauxs. The fund pushers will keep you occupied."
Has tp2006 received poorly considered fund thoughts here?
I don't find how index/passive funds would have saved anyone the grief of 2008 if they had put their head into the investing sand and only spent 3-4 hours a year looking at their holdings, and thinking that passive investing would save them. I have no problem with passive/index investing; our house has these in the mix; but these indexes sure as heck won't be any happier today than an active managed equity fund. I only know that our house is .5% ahead of a similar active fund via the E.R.
Which part of this snippet from my first post can I explain to you better?
My recommendation would be to go to wealthfront.com and click on the Invest Now button and go through the questionnaire. You don't have to register and you don't have to give any personal information. Get the portfolio recommendation they provide at the end tailored to your risk tolerance and profile. Post that portfolio here and people can then meaningfully suggest a mix of funds consistent with that portfolio.
This is not a passive vs active fund debate, don't make it one. People seem to be putting their own slant in what I said than read what I said. Don't confuse that with active vs passive portfolio management by the individual investor. Those are independent of each other. Is the distinction clear?
You cannot responsibly make a fund recommendation let alone a portfolio composition without full understanding of the individual's context and that is not provided in the bit of exchange above. The advantage of using a tool like wealthfront.com is that it makes all the assumptions explicit for the individual including their income stability, accumulation capability, drawdown implications based on their risk tolerance self-evaluation, etc. That creates a base portfolio suggestion with allocation decisions consistent with all of that context.
If he posted that then people can make suggestions on funds to consider that may be active or passive to replace or complement the funds in the portfolio and they can be evaluated based on whether they increase the risk, perform better than index, less volatile, etc.
The way it is being discussed is, in my opinion, dangerous because while they may all be good funds recommended, they vary a lot in their risk profiles, volatility, strategy, etc and unless discussed in the context of a specific portfolio strategy may or may not be a good fit.
In addition, the kind of funds and asset classes you can own depends on how active or passive you want to be in managing your portfolio. Some asset classes are not suitable for a wholly passive investor, while a more active investor needs a entry and exit strategy for the funds selected and a risk management strategy if the assumptions about a fund doesn't hold.
Portfolio construction as opposed to fund selection doesn't appear to be a strong suite amongst people here which is fine if they are just managing their own portfolio, it is their money. But when they start recommending to people, they cannot be irresponsible even if they may be well intentioned.
Reply to @tp2006: Remember that these lazy portfolios are constructed for one or two risk profiles not individual circumstances. Just borrowing one may or may not work for you. Is there a reason you seem reluctant to spend the 5 minutes it takes at wealthfront.com to get a portfolio tailored to your circumstance, less time than reading some of these messages? This is just an online version of what many advisors do with clients as the first step to get a base portfolio. It may not be perfect but it is a better starting point than any canned portfolio.
No affiliation with wealthfront. Just a convenient and free online tool that can be used anonymously.
You noted previous: 4. The above suggests a primarily passive portfolio designed for the next few decades while you focus on accumulation.
>>>>>I read that this may be your suggestion for a passive portfolio; apparently not correct.
You noted: "My recommendation would be to go to wealthfront.com and click on the Invest Now button and go through the questionnaire."
>>>>>I don't recall anything other than tp2006 stated he would check the site. I am familiar with the site and have placed various investing scenarios through the machine.
You noted: "The way it is being discussed is, in my opinion, dangerous because while they may all be good funds recommended, they vary a lot in their risk profiles, volatility, strategy, etc and unless discussed in the context of a specific portfolio strategy may or may not be a good fit."
>>>>>I believe most here already presume that they can not adjust a person's behavior or other attributes involving investing. Any suggestions are merely that, and done with the best of intentions; hopefully allowing someone who has posed a question to discover other funds, and perhaps why a particular fund may be valid. I don't see the danger in allowing a person to view a menu of funds noted by others. The person is still on their own to understand their own risk and reward system for investing. Tis not unlike someone stating that they really like hot/spicy food. I can take them to a restaurant that serves northern Chinese, Thai, Mexican and any other number of spicy eats. It is to the person to determine their own risk of taste. Nothing more or less.
You noted: "But when they start recommending to people, they cannot be irresponsible even if they may be well intentioned."
>>>>>So, no one should provide any thoughts, as requested; from a poster about funds? What irresponsible data or suggestions did tp2006 receive? Is there another solution for these questions from posters that eludes me ???
In the wayback days, I used to place a "hold harmless" statement within some writes......but it was only in jest; as everyone knew any comments were only valid to the point of applying to someone's particular circumstance(s).
Reply to @catch22: Perhaps a Physician's Do No Harm might apply here. If a Physician sees a neurotic patient they are not going to feed the neurosis further just because the patient requested it.
It might be better to elicit much more context than what was available to make suggestions meaningful or not attempt to do so. We will see what can be done with the portfolio created for his profile.
Yes, there is a potential problem with many funds in the same sector and indeed a problem with having a lot of funds. That's why this thread has had some comments against fund collectors.Basically the con is that because different managers have different views about what's nest you run the risk of having the equivalent of an index fund but paying active manager sized fees. Instead find a very few managers whose ideas and theory of investing you likes for a small % of your portfolio up to 20% and index the rest of your money, If you have chosen wisely your selected funds will outperform in some years, underperform in others ( in the underperform years basically as far as the market was concerned they were fishing in the wrong pond or part of the stream.) but hopefully do well over time. Both Schwab and Fidelity have fine index funds and provide access to good active funds.
Reply to @hank: I'm no way an experienced investor. So you read that correctly. I have a lump sum to invest right now, but will be doing dca going forward.
Reply to @jerry: Thanks for the response. From the white paper about index heavy investing that @MJG linked above, they seem to say the same about multiple funds in the same sector. But my thought was that you are spreading your eggs to different baskets instead of putting it all in one. Anyways, I think your suggestion of a portion in active funds and the other in index portfolio is good.
Btw when people reply to earlier posts, I see the red number on top of my userid in the navigation bar, but the latest comments need not be at the bottom of the page. I have to check the timestamp of each comment to see which one is new? Or may be there is a setting somewhere here to sort everything in time?
You might be running into the option we often use to reply to someone in a thread other than yourself. Yes, this does put things out of chronological order.
Reply to @David_Snowball: You mentioned a few key things to look for. Some of them I'm familiar with and know where to look for to get those info. But could you please tell me a little more on what you meant when you mentioned ...." are small enough to execute their strategy, have announced their strategy capacity" and " have high levels of insider ownership" and "trade lightly"? How small is small enough? And what volume do you consider as lightly traded? For e.g. do I search for funds with less than average volume by day?
Reply to @MJG: Read the Vanguard whitepaper you had linked. But if I read it correctly, I don't understand their "random" selection of actively managed funds from the pool based on the same sector/style (and in some cases expense ratio) for their tests vs the low cost index fund. Again, may be I read it incorrectly and it is not a truly random selection that they are picking to compare against. And I'm in no way questioning the merit of index based portfolio.
Reply to @Crash: Yeah, I think when users including myself, reply to earlier comments, they show up just below the referenced comment. Usually in most forums that I have used, new comments/replies show up at the very bottom, so don't have to go through the posts to see which ones are new.
In regards to DCAing a lump sum or not, ordinarily @Ted is correct: studies have shown that given a certain amount, lump sum investing that whole amount beats DCAing it about 70+% of the time, if memory serves.
You have to decide your own comfort level though, given two variables: 1) market valuations seemed stretched currently and we may be going through a correction; and 2) this money is for long term investing. If 1) makes you queasy, DCA. If you conclude from 2) that short term valuations matter little given a 30+ year horizon, lump sum it.
You can also split the difference. FWIW, I lost some gains last year by DCAing some inherited monies between March and September.
Comments
Regards,
Ted
http://www.mairsandpower.com/index.php?option=com_content&view=article&id=68&Itemid=69
LINK: PRWCX is still open.
http://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=PRWCX
If you want to be actively involved in potential re-allocation every 3-4 months or so (which is a perfectly valid investing strategy), you need different tools (for exit and entry Into funds) than latest fund recommendations and performance. Otherwise, you will be a fund collector not an investor who will soon resemble the person with 28 cats in the house.
This site should come with a big warning sign that fund recommendations here may damage your financial health unless used as part of a responsible and well-designed portfolio management technique.
Welcome to the club.
Sorry for my late reply, but I am not an active daily participant any longer. It’s not that the quality and sagacity of the investment exchanges have deteriorated; in reality the reverse is true. It is simply that I have morphed into a more passive investor and treasure the freedom from a heavy commitment to investment study, planning, and execution.
In that regard I hardily endorse the insights and recommendations proposed by MFOer Cman. He is precisely on-target with his current posting.
Active investing does offer its’ positive rewards, but they are hard to realize in practice. And the price for that speculative reward is a demanding time commitment. I particularly liked Cman’s cost/benefit analysis. Market returns are rather easily gained with an Index heavy portfolio. It is a portfolio’s excess returns (its Alpha), that must be measured against the time expenditure.
Historical data, when coupled to academic and industry studies, demonstrate that excess returns are often negative for an actively managed portfolio. In the rare instances when Alpha is positive, it is meager (perhaps a few percent), it is elusive, it is highly transient, and is subject to the most powerful law in the investment world, a reversion-to-the-mean pull. Odds are stiffly against consistent positive Alpha.
It took me a long time to learn that simple lesson. As a personal anecdote, I started investing in stocks in the 1950s. By the mid-1980s I converted to actively managed mutual funds. Today, my portfolio is about a 50/50 mix of active and passive mutual funds and ETFs. I am a slow learner. I plan to end with a 20/80 active/passive allocation in the near future. I like the excitement and challenge of active management just a little, and there are some investment categories that active management can profitably exploit with their selective skill sets.
I recommend you consider shortstopping my long learning experience by moving more directly into passively managed products.
Here is a Link to a recent WSJ article by Joe Light that supports my recommendation:
http://online.wsj.com/news/articles/SB10001424052702304419104579324871451038920
Mr. Light references an impressive Monte Carlo-based simulation study completed by Rick Ferri and company. Understand that Ferri is a passive Index proponent and an aggressive writer supporting that position. He is definitely a biased advocator. But his work is a useful resource when making any first-order investment decisions such as I’m now recommending to you.
Please take the necessary time to access this fine analytical series. Professor Snowball’s first two investment rules are necessary prerequisites when planning any financial matters. Here is the Link to Ferri’s extensive White Paper on the topic
http://www.rickferri.com/WhitePaper.pdf
Reading the White Paper does require a little patience, but it is well worth the effort. In its 25 pages, it emphasizes the advantage of a long-term time horizon and lays waste to the claim that multiple active managers enhance the prospects of excess rewards. His graphs vividly illustrate the asymmetric nature of active fund management returns: The negative outcomes far outweigh the positive outcomes.
The odds are stacked against the active manager. It is not that the active manager is not skilled at stock selection. He is. It is more likely caused by the management fee drag, the drain of active trading costs, and the improved competition from other very smart active managers and their well financed and talented organizations. It’s tough to win on this playing field.
Please read the Ferri paper. On a positive note, the paper’s Monte Carlo simulations do show a very low probability of perhaps a 2 % excess return outlook. Good luck on achieving that highly unlikely excess return. The risk exceeds the unlikely reward by a substantial margin.
Is that unlikely reward worth the effort? My answer is a firm “No”. There is an easy route to capturing market returns by assembling an Index dominated portfolio. Paul Farrell has endorsed that approach for decades. It’s called the Lazy-Man Portfolios. Here’s the Link that summarizes 8 such portfolios cobbled together by highly respected financial wizards:
http://www.marketwatch.com/lazyportfolio
You might want to consider these portfolios as viable options to an actively managed portfolio such as you presently own. A Lazy-Man option is surely attractive from a time saver perspective, and more likely will enhance your end wealth.
Please give it a few hours or days of open-minded and fair reflection. I wish you success in whatever decision you make. Remember, that decision need not be 100 % in one direction, and it is always open for revision. A Zebra can change its stripes in the investment universe.
I realize this is “old stuff” for veteran MFO members, but I believe you might find this review helpful. Sorry if I bored the loyal MFO contingent who are more actively motivated investors. I wish you guys success also.
Best Regards.
Regards,
Ted
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
From a quick look at the lazy portfolios..they all are Vanguard based as expected...I'll have to look up for similar funds/ETFs at Schwab/Fidelity...
Based upon tp2006's active managed fund list that he posted and what he has also noted elsewhere in this thread about allocation percentages into various sectors; I am surprised that you have not offered an index/etf selection to fulfill a passive strategy.
You noted: "If you are prone to investing like collecting wine or toy trains and it is the hobby aspect of it that excites you, you have come to the right place. Soon you will be talking about your cellar selection and the difference between 2005 and 2010 bordeauxs. The fund pushers will keep you occupied."
Has tp2006 received poorly considered fund thoughts here?
I don't find how index/passive funds would have saved anyone the grief of 2008 if they had put their head into the investing sand and only spent 3-4 hours a year looking at their holdings, and thinking that passive investing would save them.
I have no problem with passive/index investing; our house has these in the mix; but these indexes sure as heck won't be any happier today than an active managed equity fund. I only know that our house is .5% ahead of a similar active fund via the E.R.
Regards,
Catch
Which part of this snippet from my first post can I explain to you better? This is not a passive vs active fund debate, don't make it one. People seem to be putting their own slant in what I said than read what I said. Don't confuse that with active vs passive portfolio management by the individual investor. Those are independent of each other. Is the distinction clear?
You cannot responsibly make a fund recommendation let alone a portfolio composition without full understanding of the individual's context and that is not provided in the bit of exchange above. The advantage of using a tool like wealthfront.com is that it makes all the assumptions explicit for the individual including their income stability, accumulation capability, drawdown implications based on their risk tolerance self-evaluation, etc. That creates a base portfolio suggestion with allocation decisions consistent with all of that context.
If he posted that then people can make suggestions on funds to consider that may be active or passive to replace or complement the funds in the portfolio and they can be evaluated based on whether they increase the risk, perform better than index, less volatile, etc.
The way it is being discussed is, in my opinion, dangerous because while they may all be good funds recommended, they vary a lot in their risk profiles, volatility, strategy, etc and unless discussed in the context of a specific portfolio strategy may or may not be a good fit.
In addition, the kind of funds and asset classes you can own depends on how active or passive you want to be in managing your portfolio. Some asset classes are not suitable for a wholly passive investor, while a more active investor needs a entry and exit strategy for the funds selected and a risk management strategy if the assumptions about a fund doesn't hold.
Portfolio construction as opposed to fund selection doesn't appear to be a strong suite amongst people here which is fine if they are just managing their own portfolio, it is their money. But when they start recommending to people, they cannot be irresponsible even if they may be well intentioned.
No affiliation with wealthfront. Just a convenient and free online tool that can be used anonymously.
US Stocks Vanguard VTI ETF 21%
Foreign Stocks Vanguard VEA ETF 18%
Emerging Markets Vanguard VWO ETF 22%
Dividend Stocks Vanguard VIG ETF 13%
Real Estate Vanguard VNQ ETF 16%
Corporate Bonds iShares LQD ETF 5%
Emerging Market Bonds iShares EMB ETF 5%
You noted previous: 4. The above suggests a primarily passive portfolio designed for the next few decades while you focus on accumulation.
>>>>>I read that this may be your suggestion for a passive portfolio; apparently not correct.
You noted: "My recommendation would be to go to wealthfront.com and click on the Invest Now button and go through the questionnaire."
>>>>>I don't recall anything other than tp2006 stated he would check the site. I am familiar with the site and have placed various investing scenarios through the machine.
You noted: "The way it is being discussed is, in my opinion, dangerous because while they may all be good funds recommended, they vary a lot in their risk profiles, volatility, strategy, etc and unless discussed in the context of a specific portfolio strategy may or may not be a good fit."
>>>>>I believe most here already presume that they can not adjust a person's behavior or other attributes involving investing. Any suggestions are merely that, and done with the best of intentions; hopefully allowing someone who has posed a question to discover other funds, and perhaps why a particular fund may be valid. I don't see the danger in allowing a person to view a menu of funds noted by others. The person is still on their own to understand their own risk and reward system for investing.
Tis not unlike someone stating that they really like hot/spicy food. I can take them to a restaurant that serves northern Chinese, Thai, Mexican and any other number of spicy eats. It is to the person to determine their own risk of taste. Nothing more or less.
You noted: "But when they start recommending to people, they cannot be irresponsible even if they may be well intentioned."
>>>>>So, no one should provide any thoughts, as requested; from a poster about funds? What irresponsible data or suggestions did tp2006 receive? Is there another solution for these questions from posters that eludes me ???
In the wayback days, I used to place a "hold harmless" statement within some writes......but it was only in jest; as everyone knew any comments were only valid to the point of applying to someone's particular circumstance(s).
Regards,
Catch
It might be better to elicit much more context than what was available to make suggestions meaningful or not attempt to do so. We will see what can be done with the portfolio created for his profile.
Yes, there is a potential problem with many funds in the same sector and indeed a problem with having a lot of funds. That's why this thread has had some comments against fund collectors.Basically the con is that because different managers have different views about what's nest you run the risk of having the equivalent of an index fund but paying active manager sized fees.
Instead find a very few managers whose ideas and theory of investing you likes for a small % of your portfolio up to 20% and index the rest of your money, If you have chosen wisely your selected funds will outperform in some years, underperform in others ( in the underperform years basically as far as the market was concerned they were fishing in the wrong pond or part of the stream.) but hopefully do well over time. Both Schwab and Fidelity have fine index funds and provide access to good active funds.
Btw when people reply to earlier posts, I see the red number on top of my userid in the navigation bar, but the latest comments need not be at the bottom of the page. I have to check the timestamp of each comment to see which one is new? Or may be there is a setting somewhere here to sort everything in time?
You have to decide your own comfort level though, given two variables: 1) market valuations seemed stretched currently and we may be going through a correction; and 2) this money is for long term investing. If 1) makes you queasy, DCA. If you conclude from 2) that short term valuations matter little given a 30+ year horizon, lump sum it.
You can also split the difference. FWIW, I lost some gains last year by DCAing some inherited monies between March and September.