Regarding DoubleLine Total Return - there are two different issues here. One is whether a MBS fund is a good idea, and the other is whether Grundlach (and DoubleLine) is the best way to get such a fund.
I'll discuss each of these below, but my personal opinion on each question is "no".
Despite being called a "total return" fund, Grundlach (along with his flagship fund) is essentially an MBS bond manager. That's the way he ran TCW Total Return, and the way he continues running his new charge. As good as he is within this sector, a fund like this seems to be what you are asking to escape - a fund that is locked into one sector of the market (albeit able to move along the yield curve within the sector). Also one that makes heavy use of derivatives (like Bill Gross at PIMCO).
Don't get me wrong - I like intelligent use of derivatives. The fact that Bob Rodriguez makes use of interest only bonds (a form of inverse floater) is one of the things that attracted me to FPA New Income (FPNIX). But unlike that fund, which uses derivatives in moderation to reduce risk, Grundlach and Gross seem to make their use a core part of their strategy. These tend to be less liquid and as M* notes (in its analysis of DoubleLine Total Return), puts the funds at more risk in times of stress.
As a sector, MBS bonds command a somewhat higher yield, because of their lower (or even negative) convexity. This works to one's advantage in a stable, or even gradually and smoothly rising interest rate environment, but these bonds can take a pounding when interest rates are unstable or rapidly rising. Not a risk I would personally take now, at least not one where I would place 100% of my money as DoubleLine does.
For the past few years, there's been an anomaly in the market that has mitigated some of the normal MBS risk. With many homes under water, people were less able to refinance, so mortgages behaved more like "normal" bonds. Housing prices have recovered in many (albeit not all) parts of the country, so MBS securities may be approaching their traditional risk levels.
Assuming one does want a MBS fund, why Grundlach? One has to ask whether his old charge TCW Total Return, would be a better choice. With the latter, you get MetWest, which you seem to like as a management company. While Grundlach did better out of the gate (2H2010-11), that was with heavy use of derivatives - see above - and with a much smaller fund. He's now got a fund that's 4.5x as large as TCW, and has underperformed the MetWest team in 2012 and 2013. (Except for 2Q 2013, he's underperformed each quarter.)
It's not as though he's using a different strategy - various attributes of the two funds' portfolios - sectors, duration, credit ratings, are extremely similar (though TCW seems to have a small but not insignificant amount of short maturity bonds that are lacking in the DoubleLine portfolio).
Fundamentally though, I don't see any MBS fund meeting your interest in a fund that makes use of the full bond market. And I think their risk is rising as the possibility of "tapering" increases (simply because that roils the market).

Reply to @Ted: Who said otherwise? It looks great, but greater than it arguably is, because it's just escaped that bad window period. Do the math, check the graphs, rather than attempting to contradict something illusory. You of all analytic types here would snort at a valentine article about 'sticking with something pays off' without sufficiently noting sample periods, reversion to mean, risk-adjusted returns in detail for tough times, overall risk compared with peers, and the like. Patience required, as M* puts it. Some would ask about its ulcer index compared with YAFFX, say.

Not having read the studies, I may be way off base, but IF active managers show persistence in exceeding their benchmarks, the citations in other older posts that almost no fund managers exceed index funds through two market cycles seems contradictory. Either the number of active funds is so small or the funds are so small that they escaped notice and weren't compared to indexers or the quoted study didn't include enough cycles. My vague recollection is that fewer than 1% of funds exceeded the index funds through three market cycles, but that could be an invented memory.
Alternatively, the successful funds attracted so many assets that they had to fail due to a dearth of good ideas, requiring money to be shoved into "safe" stocks and returning to their benchmark.

Decided to go with the CAPE or PE10 slopes and sold most of my recent mutual fund gains while keeping the base positions (probably should have sold more, but I can't make myself leave good funds). I didn't sell the L/S funds, but I may reconsider the long predominant funds.
Plan to put most of it into RSIVX and try to control my impatience.
My pending buys require a 10% correction.
Haven't reduced my stocks, probably a mistake, but I'm not paying 1-1.5% a year for them, and most pay a dividend.
Didn't sell in 2008-9, but was younger then. Won't sell if it happens within 3 years. Plan to be more balanced after that.
Fund managers generally did no better than the indexes in 2008-9. Those with significant cash now are preparing for the next correction, so they might be worth buying.
Depending on your age and risk acceptance, using index funds with 50-70% US stocks and the remainder of your stocks in international indexes, and 20% (high risk acceptance) in bonds (most writers suggest all US, but I like some international thru Vanguard), or 40% bonds (usual ratio)) has been good in the past. If near retirement, Social Security represents a bond equivalent, as per John Bogle, who has a lot more experience and is older than I, so you should shade your investments more toward stocks.

Reply to @willmatt72: Thanks for the question. I've used RPIBX only sparingly in the past and currently hold only Oppenheimer's OIBAX in that segment, which I think is the better fund. Yes - lackluster performance as you say
Let me guess: (1) Price's fixed income funds weren't very good up until around 2004 or 2005 when Mary Miller became head of their fixed Income division. (She has since left for a position at Treasury.) Apparently, Mary's positive influence somehow escaped this fund. (2) Price's foreign investing over the years hasn't been a strong suite either, and that may have impacted this fund. (3) RPIBX holds little, if any, in lower quality and EM debt, sticking pretty much with investment grade paper. In the past this resulted in its lagging funds like OIBAX, which holds a sizable chunk of such debt. While it's true EMs have suffered this year, higher quality paper in interntional markets hasn't escaped damage either as the Dollar soared against major world currencies - a consequence of rising rates at home and falling rates abroad (especially in the developed nations of Europe where RPIBX has significant holdings.) Higher credit quality tends to increase a bond's sensitivity to interest rates and currency fluctuations.
Those are my three best guesses as to what's going on there. It's likely some combination of all three. Let me say: I'd never expect RPIBX to be a sector leader, mainly because Price is a conservative house who generally won't play games to enhance returns in its fixed income funds (an area where additional risks are often taken in search of yield). Nonetheless, I would expect RPIBX to rank somewhere among the top 25% - 35% of its peers - which it presently does not. And all this said, I still recommend Spectrum Income (RPSIX) as a very good fund that might meet your needs. Price seems to excell at making allocation decisions. And the other international income fund it holds, PREMX, is generally very well regarded.

For a comment worth even less than 2 cents:
Having ridden FAIRX & FAAFX down and finally up and having an AIP for FPACX, I have to believe that the CAPE or PE10 numbers mean something at the current market values, which (to me) is that one should select managers with good records and big cash holdings or invest as an act of faith with one's chosen star(s) - which statistics show is not better than index investing for the truly long run.
As I have learned, patience before investing is as important as patience after investing, since I have real difficulty selling a fund or stock.
Were I you (which you should be grateful I am not), I'd invest 30% of my intended amount and wait. If it goes up, you have something; if not, you can put in some more later. Obviously, I expect the market to regress closer to its mean in time. It's difficult to sit on cash, so buy RSIVX or a similar fund of your choice.

Lord, this is weak stuff. I like many think the market above CAPE 25 +/- may well be due for a drop, soon, later, whatever, and it may be because of these tenuous reasons, or other arrows from the horizon, so to speak, or a purple swan, or whatever. This is still a weak piece.

You're right. 5000 active funds might well require 5000 boxes to ensure a great fit. I wonder if a compromise is to add another (I know, I know) bit of information: quality of fit. Morningstar calculates (but does not always publish) R-squared values that measure the degree of fit between a fund and a category.
I wonder if there are valid statistical grounds for saying that, for funds with an R-squared above 90, the category is a good fit. For funds from 80-89, the category is a fair fit. For funds below 80, the category is a poor fit? The numbers here are just illustrative, since I barely escaped Stats alive.
So: for Fidelity Low-Priced Stock, they might report: "FLPSX is judged as a mid-cap blend fund. There is only a fair match between the fund and this category" or "RPHYX is judged as a high yield bond fund. There is a poor fit between the fund and this category."
The FLPSX peer groups are, by the way, Mid-Cap Blend for performance, Mid-Cap No Load for fees and expenses, and Lifetime Moderate 2040 for MPT stats. Nuts.
Ah pity da wall that crosses Catch.
David

CAPE (Shiller PE index) graph can be found here
http://www.multpl.com/shiller-pe/

Two questions
1) How do I chart CAPE. I want to see a chart that says it is 25. Allegedly this info is publicly available. Where?
2) Why is Cliff Asness referred to in that article? He has a pulled a caper all right with AQR investors.

Reply to @Ted: "Well, I don't care if I do-die-do-die-do-die-do-die. ..."
Related: Four Oklahoma Inmates Escape Through Jail Shower
http://usnews.nbcnews.com/_news/2013/10/27/21189462-four-oklahoma-inmates-escape-through-jail-shower?lite

Hi Guys,
I just returned from one of my escape completely sea cruises. During these cruises I completely isolate myself from any worldly event distractions. Given the markets ascendancy during my absence, I suppose I ought to do this more often.
I was very pleased to learn that Gene Fama has been honored with a Nobel economics award. He has earned it across many decades of fine, productive work
When Fama and Ken French initially published their 3-factor equity market model, I directly challenged it with a post to him suggesting some possible data mining contamination. Fama graciously responded by advising me that he addressed that same issue by successfully exposing his model to 17 sets of foreign market data. He sent me the actual data sets so I could confirm his analyses. I did not pursue the matter any further.
Fama and French have had to defend the efficient market hypothesis for a long time now. Communications enhancements have vindicated their commitment to that controversial model assumption. If it was somewhat true 50 years ago, it is more so today given the growing tsunami of financial information sources. It is not perfect yet, and will never be so, but the investment marketplace is functionally efficient.
Famous stock operator Jesse Livermore observed that “Markets are never wrong – opinions often are”. This during a period when Bucket Shops corrupted the honest market pricing mechanism with misinformation. We are now more free to choose our own poison.
I am genuinely surprised that Ken French did not share in the Nobel award. The sharing would have been proper in the tradition of the Tversky-Kahneman team effort, and, the options pricing model of Black, Scholes, and Merton.
Fama is still the recipient of a ton of enemy hostile flak; respect has been a hard fought and elusive battle. Even with a Nobel prize under his belt, the critics still fire away. In an October 19 posting on the excellent 25iq website, its chief continued the barrage with an unfriendly article that identified “Ten Investors Who Prove Fama is Suffering from Confirmation Bias”. Indeed, Fama gets too little respect. Here is the Link to the supposedly anti-Fama cohort:
http://25iq.com/
The list of 10 contributors is a notable honor roll of superior active investors. All of the men on it are remarkable, exceptional, talented investors. They are surely not the average investor. I find it equally remarkable that at least half of the gentlemen who populate the listing are rather strong advocates of a passive investment strategy for the prosaic “average” investor. Wizards like Soros, Buffett, Templeton, Lynch, and Munger recognize the shortcomings of the common market investor and endorse a passive Index strategy for these folks.
I was also pleased to learn that Robert Shiller was awarded a Nobel prize in economics. Unlike Fama, Shiller is a very humble scientist who recognizes the limitations of his Cyclically Adjusted Price to Earnings Ratio (CAPE) model and his Housing Market Index model.
The 10-year Earnings data smoothing that is incorporated into the CAPE formulation only modestly improves its forecasting accuracy. Even over the decade-long timeframe, CAPE only explains about 40 % of future market movements with considerable data scatter about the predicted trend-line. Here is a Link to a recent Vanguard study that explored the usefulness of 16 common market predictive tools including CAPE:
https://personal.vanguard.com/pdf/s338.pdf
The Vanguard research team concluded that none of the frequently deployed predictive tools did yeomen work in forecasting future equity rewards. Many had zero correlation coefficients with future returns; they failed in both the short and long-term time horizons. Even the much admired Fed Model suffers from a near zero predictive capability. It always pays to test these models against fresh, out-of-sample data.
The Shiller CAPE model proved to be the most effective market forecasting tool over extended periods. It too failed on an annual basis. Shiller does not trust any short term predictor. A deliberate detachment from the crowd herding influences are “the best way to avoid getting swept up in the next bubble" according to an earlier Shiller interview reported by Jason Zweig in last Saturday’s Wall Street Journal.
Even a dedicated trader like Jesse Livermore understood that “Few people ever make money on tips”. As part of his 21 investment rules he observed that “If there was easy money lying around, no one would be forcing it into your pockets”.
Bad advice is pervasive within the investment universe. Livermore learned that truism at an early age, but his constant speculative investment decisions made him millions and lost him millions several times over his lifetime. He lived Big, but sadly, he died a defeated man.
Enjoy the references. Although I enjoyed my holiday away from the marketplace, I’m happy to be home again.
Best Regards.

Happy October David!
Very much enjoyed the commentary this month, once again.

Thirty-three percent of the currently fantastic funds were not so distinguished twelve months ago.

Suspect that is true of so many "Best Funds" lists! In this case such wisdom only cost $250.
I'd venture to say you believe FPA Paramount looks pretty promising, despite its strategy change and new manager (ie., David's Take of FPRAX is Positive). High marks for parentage and its manager's performance with FPIVX, even if the September's profile proper seemed a bit ambivalent.

There is one and only one bright spot in the picture for active managers: international small cap funds, nearly 90% of which outperform a comparable index. Which international small caps qualify as Fantastic you might ask? That would be, none.

Gotta love it.

The bottom line: invest your intellectual resources where your likeliest to see the greatest reward. In particular, managers who invest largely or exclusively overseas seem to have the prospect of making a substantial difference in your returns and probably warrant the most careful selection. Managers in what’s traditionally the safest corner of the equity style box – large core, large value, midcap value – don’t have a huge capacity to outperform either indexes or peers. In those areas, cheap and simple might be your mantra.

Nice!
Tealeaf Fund "will eventually ask you for 2.62 – 3.62% of your money each year." No words.

Nice graphic.

What does the large-cap growth or small-cap value manager do when there are no good opportunities in their style box? They hold cash, which lowers your exposure to the equity markets and acts as a lead-weight in bull markets, or they invest in companies that do not fit their criteria and end up taking excess risk in bear markets. Neither one of these options made any sense when I was managing family-only money, and neither one made sense as we opened the strategy to the public …

My thoughts precisely!
"If there is no opportunity, we leave the space." But Mr. Frank remains invested in equities, of some market cap, looks like. FRNKX came into its own during current bull run:

OBIOX ranks top honors in the MFO risk-adjusted rating system for the past 3 and 1 year periods. "Indeed, OBIOX in 2013 isn’t even the OBIOX of 2009." Good thing. Between October 2007 and March 2009, OBIOX incurred a horrifying -70% drawdown. It rates a 2 in risk-adjusted return over past five years. After six years, the new strategy is producing new highs.

Just registered for the Beck, Mack & Oliver Partners (BMPEX) call. Absolutely love these calls. You're changing landscape here David.

In early December we’ll give you a chance to speak with the inimitable duo of Sherman and Schaja on the genesis and early performance of RiverPark Strategic Income, the focus of this month’s Launch Alert.

Looking forward to this!
As of Friday, 10/4, RiverPark Strategic Income Fund (RSIVX, RSIIX) was still not available at Schwab.
Looking forward to reading Greener Pastures.
"Virtus Dynamic AlphaSector Fund (EMNAX)...Class A Shares, 2.56%; Class B Shares, 3.31%; Class C Shares, 3.31%; and Class I Shares, 2.31%." No words.

FMI Focus (FMIOX) will reorganize itself into Broadview Opportunity Fund in November. It’s an exceedingly solid small-cap fund (four stars, “silver” rated, nearly a billion in assets) that’s being sold to its managers.

Interesting.

Meridian Value (MVALX) is Meridian Contrarian Fund. Same investment objective, policies, strategies and team.

Wow.
"They are killing off three funds that were never a good match for the firm’s core strengths." Good for M&N.
Just don't know how you pack so much in every month! In any case, can't thank you (and Chip et al) enough.
Off to farmers' market.
Charles

Hi Guys,
Some recent research that focused on a portfolio’s fixed income holdings by financial and retirement planning heavyweights has prompted a reevaluation of the recommended bond percentages in that target portfolio as a function of time horizon.
Some of this debate raged in the MFO discussion titled “Bonds, Be Gone”. For completeness, here is the Link to that discussion:
http://www.mutualfundobserver.com/discussions-3/#/discussion/8079/bonds-be-gone
Not surprisingly, the research wizards conclude that the proper percentage is time dependent. The newer body of research emphasizes a tipping point between the accumulation and the distribution phases of a portfolio’s lifecycle.
The conventional wisdom had been that a bond allocation should increase with age to dampen volatility disruptions, especially critical soon after the distribution phase begins.
More controversial is the finding that current Monte Carlo-based research suggests that just before the retirement date, and soon afterward, the portfolio should go heavy into bonds to blunt the possible impact of any Black Swan events in this crucial timeframe. Further, these newer findings advocate an increase in equity positions as the retirement progresses to battle inflation and to augment the likelihood of portfolio survival.
Flexibility in annual drawdown rate, especially after a market downturn, remains a recommended tactic to enhance survival probability prospects. An obvious successful tactic to escape portfolio bankruptcy is to reduce withdrawal rates immediately after a market down year.
The standard portfolio wisdom almost never advocates a totally 100 % equity portfolio, except for perhaps the situation of an investor who is 30 years removed from any withdrawal needs. This is not a novel concept. It has been a constant part of retirement planning for centuries. Prudent investors like Benjamin Graham have consistently recommended this policy.
Benjamin Graham is recognized as one of the rare Wall Street masters. It is less well known that he was the teacher of many other Wall Street giants. That tiny group includes the likes of Warren Buffett, Bill Ruane, Walter Schloss, and a host of others identified in Buffett’s famous “The Superinvestors of Graham-and-Doddsville" paper.
Graham summarized his lessons from a lifetime of mostly successful investing in a little known lecture that he delivered in a November 1963 San Francisco presentation. His lessons learned are still pertinent today since the fundamental uncertainties of yesteryear are still relevant today. There is much investment sagacity in this 14 page record of his speech. Here is the Link to this Graham lecture treasure:
http://www.jasonzweig.com/documents/BG_speech_SF1963.pdf
Graham warns that “Hence a large advance in the stock market is basically a sign for caution and not a reason for confidence”. The San Francisco presentation is dense with these common sense observations.
For example, Graham notes that the higher the market advances, the more the investor should mistrust its future advance.
Graham accepts wild market price fluctuations (volatility) as a rule rather than an exception. He claimed he gave up trying to make market predictions after 1914 because it was not a dependable, prudent investor’s game; he is very humble when he proclaims that even making a one year forecast is an unreliable, unproductive chore.
Even in 1963, Graham reluctantly acknowledged the difficulties that professional money managers encountered in beating appropriate market indices. He is skeptical about the efficacy of economic, stock market, and financial forecasting. The evidence suggests otherwise; predictions are notoriously error prone.
Graham preemptively makes the global Bill Sharpe argument about the requirement to balance all returns among the investment population before Bill Sharpe himself makes an identical case. What one active investor earns above some standard metric, another less fortunate investor must sacrifice.
Graham talks about the relative dividend gap between bonds and stocks, and highlights the modeling of this gap over the years. He defends a mixed fixed income-equity portfolio asset allocation that varies between 25 % to 75 % equity holdings. Although Graham favors a higher concentration of equity positions when the price is right (cheap), bonds are always part of the Graham ideal portfolio. He favors dollar cost averaging approaches. He likes mutual funds as an easy, cost effective way to fully diversify. He doubts that many investors have the skills and discipline to invest in individual stocks.
I strongly recommend that you access the Graham 1962 presentation. Although the quoted data are stale, the basic concepts retain their vitality. Be patient; the download is slow, but well worth the wait. Benjamin Graham’s market acumen and operational rules will make you a better investor.
Graham asserts that (from page 8) “… there is no indication that the investor can do better than the market averages by making his own selections or by taking expert advice.”
That’s a significant concession from a market legend. With the exposure and absorption of 5 decades of experience, Graham observed that he knew less and less about what the market would do, but he gained perspective on what investors ought to do.
In the end, without explicitly stating it, Graham was really touting passively managed Index mutual fund/ETFs since professional managers did not advance returns above general market rewards. Remember, in the 1962 lecture timeframe, Bogle’s Index fund dream was just starting to jell.
Graham concluded his lecture, as I will this post, with the positive admonition that “by following sound policies almost any investor- even in this insecure world – should be able to eat well enough without having to loss any sleep”. Amen to that.
Your comments are always welcomed and encouraged.
Best Regards.

Hi Guys,
Thank you for contributing to this hot button issue. Your submittals added depth to my original posting. I really do respect your diverse opinions.
The decision to purchase actively managed mutual fund products is a critical portfolio construction factor that demands careful research and a time commitment. Unfortunately, it is often saddled with a vested value attribution bias that resists change.
From Paul Simon: “ A man hears what he wants to hear and disregards the rest”. Active fund investors will energetically and selectively defend their strategic choice; passive fund investors will do the same. Behavioral researchers document this hardwired proclivity time and time again.
Nobody denies that there are excess return successes in the active mutual fund community. However, the historical data suggests these are rare instances that are nearly impossible to identify a priori. The SPIVA data sets and Mr. Dash’s interpretation of that data admit to that finding.
I concur that the odds of finding these super funds improve with diligent, committed research that focuses on cost control, reduced portfolio turnover, manager longevity, and a record of positive Alphas. But these are not new techniques; they have been applied by informed investors for decades. Persistence in these areas is elusive and is the primary issue.
The iron law of regression-to-the-mean has an ugly way of injecting itself into the scenario to ruin the excess returns. Sometimes, a very successful fund manager overrates his skill set and abandons the mutual fund to direct a hedge fund. The payday incentive is strong.
Anecdotally, a long time ago I owned the Magellan fund under Peter Lynch. He generated excess returns for years until he lost the magic and quit at a young age. Today, I own the Fidelity Contrafund under William Danoff’s guidance. He outperformed his benchmark for many years until about five years ago. Since that tipping point, Mr. Danoff is underperforming his benchmark. Indeed, the investment world experiences a strong pull towards the regression iron law. Few managers escape that pull.
If it is your investment preference to use actively managed funds to accomplish your target golden ring, by all means reach out and grasp it. My only reservation is that you be fully aware of the risks of failure and the odds for success. Every gambler knows that the secret for survival is a complete understanding of the odds. Then just go for the dream.
At its core, picking anticipated superstar fund managers is just educated guesstimates. It is equivalent to a gambler rolling dice that he feels he can control. Good luck on that score.
I do wish all MFO investors good fortune. I sincerely hope that your hard work does not go unrewarded. I do believe that you have chosen a twisting, bumpy road, and meticulous industry is mandatory to avoid that road’s many potholes. A touch of good luck is also needed.
I have never divulged my portfolio details; I will not violate this self-imposed rule now. My reasons are simple.
Given my age, the size of my portfolio, and my legacy goals, I expect that within the MFO community, I am in a very thinly populated cohort. With high likelihood, my portfolio is not suitable for anyone else’s purposes. In fact, it might do some harm if improperly interpreted.
Secondly, I consistently choose not to position myself as a racetrack tout. I have a low tolerance for stock and mutual fund pickers. I do not admire Jim Cramer types.
I have forever posted in terms of educational material, statistical base rate know-how, and understandable references. Mutual fund selection for a portfolio is a very personal project; it does not travel well. The numerous best mutual fund lists offered by the media and market gurus are next to useless. That’s my opinion, and I remain loyal to it.
I recognize that it is a mental chore to deal with information that conflicts with investment wisdom that you have adopted. The behavioral wizards would say that the rejection of dissimilar opinions is all about confirmation bias selectivity. But the decision making wizards would say that exposure to alternate options is necessary conflict to reach a better decision. As painful as it might be, I endorse the artful decision maker philosophy.
Group think is to be avoided since it produces flawed and/or non-optimum solutions. The Boglehead website likely (I don’t go there so I’m guessing) suffers that limitation. My post there would do no good; I believe my post here benefits a few MFO members. I plan to continue the march.
With that closing assertion, I will now take my leave.
Once again, thank you all for your generous and gracious participation in this somewhat controversial thread. I appreciate your efforts and your well crafted opinions.
Best Wishes.

Hi Guys,
Do you consider yourself an Active or a Passive investor?
I fully recognize that this is not an either/or question for most investors. Many of us would likely characterize ourselves as somewhere in the mid-spectrum that exists between the polar 100 % active advocate and the opposite 100 % passive proponent bookends.
I propose that how an investor answers two simple questions goes a long way at identifying his position on that spectrum. Here are the two basic yes/no questions.
Do you believe that market timing is a repeatable skill?
Do you believe that stock selection is a lasting skill?
The yes/no replies to these questions establish a 2 by 2 dimensional matrix.
If you answered yes/yes, you are in group 1. If you responded yes/no, you are in group 2. If you replied no/yes, you are in group 3. And if you concluded no/no, you are in group 4.
The interpretation of the matrix assignment is not rocket science. The group 1 residents are likely strong active fund true believers. The group 2 and group 3 residents are still active fund management supporters, but perhaps less adamantly so. Within the group 4 box you will find the passive Index fund proponents.
I’m sure this simplistic and linear interpretation shocks nobody. A more interesting question is: Does your investment style conform to the matrix answers that you provided?
I suspect some noteworthy exceptions exist. This little quiz might serve to crystallize your thinking on the subject; it might also help to adjust your investment style such that it is more compatible with your feelings towards the two investment dimensions that these questions probe.
I answered no/no with little hesitation. So, I am firmly in the group 4 category camp. Yet my portfolio has both active and passive mutual fund/ETF holdings. I suppose that’s because I do think that some talented professionals can enhance performance at the margins with a smidgen of superior stock selection and/or timing skills. The issue with me is that I question if they can accomplish these demanding tasks persistently, and with enough excess rewards to overcome the incremental costs. Deep down, I seriously doubt persistency, and I see the cost hurdle as almost insurmountable.
I am surely not alone in the group 4 category. My cellmates come with extraordinary credentials and authority.
From the investment community there is Warren Buffett, Charley Munger, John Bogle, Benjamin Graham, Peter Lynch, Ted Aronson, Rick Ferri, and Charles Schwab.
From the ivy covered walls of academia we have Bill Sharpe, Burton Malkiel, Paul Samuelson, Daniel Kahneman, David Swensen, Jack Meyer, and Andrew Lo.
Continuing, from the financial journalists army, there is Mark Hulbert, Jason Zweig, Jonathon Clements, Allan Roth, and Holman Jenkins. Ted’s posting of Mark Hulbert’s Butter and S&P 500 article actually prompted me to post. Hulbert is a recent convert into the group 4 rating.
It’s a mighty crowded room that is currently more heavily populated by institutional agencies. These agencies are replacing active management with a passive Index approach because of disappointing results over time..
The empirical evidence says that superior, persistent active management outcomes are sparse with miniscule odds of success. A recent Dimensional Fund Advisor study showed that only 1 % of actively managed equity funds beat their benchmarks for 5 straight years (23 out of 2,231).
I certainly could not a priori identify members of this illusive group of winners. As Winston Churchill remarked: “The greatest lesson in life is to know that even fools are right sometimes.” The debate over skill and luck within the investment community remains unresolved, but the smart money is more and more betting the luck side of that controversy.
The active fund management landscape is littered with fallen idols. Ken Heebner’s CGM Focus fund was the very best performing mutual fund from 2000 to 2009. It has hit hard times over the last 5 years. It is an extremely volatile fund that induces frequent investor turnover. Even while it was returning 18 % annually during that period, its clients were rewarded with a startling minus 10 % annual loss. That’s tragic.
Bad entry/exit timing seems to be the norm among active mutual fund supporters. They love to play the “Hot” hand. History demonstrates that Hot reverts to Cold very quickly and very unpredictably. Once again, individual active fund investors are victims to the market’s “regression-to-the-mean” law.
DALBAR annual studies consistently conclude that private investors receive less than one-half of the returns that their purchased mutual funds deliver. Individual investors have a notoriously negative timing sense that erodes their wealth.
All these studies and data are distressing and depressing, but also enlightening. Years ago, I was 100 % committed to active mutual funds. That is no longer the case. Today, two-thirds of my portfolio is consigned to passive holdings. I’m slowly learning and migrating in the passive direction.
Why not all the way? One answer is that I like the excitement, the fun, the entertainment value. Another is that I enjoy the challenge. Yet another is that I’ve been lucky all my life and hope that luck continues.
However, none of these reasons are compelling. None of these considerations override my desire for cost containment and overarching reliability. The marketplace is wild enough without accepting the additional risks of downside excursions introduced by sometimes hot, sometimes cold, often unpredictable active management. The normal market risk completely satisfies any residual boldness risks that I might still harbor.
Your thoughts on this matter will greatly enhance the value of this posting line. Please contribute to balance and extend the scope of this topic.
Best Regards.

http://www.financial-planning.com/news/how-to-succeed-in-the-wealth-management-industry-2686470-1.html?gpt_units=/DCDB
http://investwithanedge.com/
limbo season
http://investwithanedge.com/index.php?s=editor+
Editor's Corner
Limbo Season
Ron Rowland
It’s limbo time, and we aren’t referring to the Caribbean dance where participants lean backward to pass under a pole. However, some political pundits would proclaim that President Obama’s recent contortions regarding military actions in Syria are quite limboesque as he tries to avoid touching the pole of political fallout. Today, we are going to use the non-dance and non-religious definition of limbo: “an uncertain period of awaiting a decision or resolution; an intermediate state or condition.”
Last week, as evidence mounted against Syrian President Assad, President Obama declared he was prepared to begin launching missiles immediately. After U.K.’s Parliament voted against military action and some U.S. citizens voiced their displeasure, the president reversed course and said he would first seek authorization from Congress. This process could take days or weeks, during which the status of U.S. military strikes against Syria remain in limbo.
Tapering of the Federal Reserve’s $85 billion in monthly bond purchases has been in limbo since May. Recent consensus suggests the Fed could begin tapering operations later this month at its next FOMC meeting. The September 18 post-meeting policy statement and press conference will be closely watched.
Remember the debt ceiling? It’s back. Latest estimates put mid-October as the time when the U.S. Treasury will hit its debt ceiling. Both sides of the aisle appear to be digging in their heels for a fierce and extended fight. Congressional leaders have had months to work out a plan, but this is expected to go down to the wire once again, leaving the debt ceiling in limbo for another six weeks.
We also had a little bit of limbo in the quote mechanics during trading today. The Nasdaq added to its quote problems of a couple weeks ago with a six minute outage today, and the NYSE piled on with its own nine minute lapse.
Last, and also least, the season is in limbo. Labor Day weekend and back-to-school define the “End of Summer” for most U.S. citizens. For many, this week marks a period of new beginnings, surpassed in importance only by the annual rollover of the calendar year on January 1. However, the autumnal equinox (for the northern hemisphere) doesn’t occur until September 22, marking the true end of summer and beginning of autumn. Summer is now in limbo and will remain there for the next 18 days.
Sectors
Technology held on to its first place ranking and even managed to post a gain for the week. However, upside momentum is slowly evaporating for it and most other sectors. Health Care, Consumer Discretionary, and Energy all climbed two spots and now hold the second through fourth place positions. Their improvement was made possible by declines in Materials and Industrials, which slid down to occupy fifth and sixth respectively. The bottom five categories are in downward trends and posting negative momentum larger in magnitude than a week ago. Their relative order remains the same with Real Estate firmly entrenched in last place.
Styles
The quantity of negatively trending Style categories doubled since last week from two to four. Additionally, Large Cap Growth is hugging the zero line and could easily be pushed either direction. Market leadership still resides in the lower-right-hand corner of the Style Box. Small Cap Growth and Micro Cap take top honors again, and their duopoly on control of the top is now entering its fourth month. Mid Cap Growth and Small Cap Blend swapped places, but the change does little to alter the overall landscape. Large Cap Growth edged into the top five, which now marks a clear market preference for Growth over Value. In fact, all three Value categories are now in negative trends along with last place Mega Cap.
Global
Just four Global categories are posting positive momentum scores today. China had an impressive week, moving up from second place to take the top spot away from Europe. Europe lost ground as both stocks and the euro came under pressure the past week when tensions in Syria escalated. The U.K. held steady in third place and is now attempting to renew its rally. Canada continues its slow climb up the rankings, not by displaying strength but by simply holding its ground the past few weeks. EAFE, the U.S., and World Equity all flipped over to negative momentum. If today’s upward moves prove to be sustainable, then all three could be back in positive territory by next week. Pacific ex-Japan posted excellent results for the week boosted by strength in all its constituents except Singapore. Japan slipped a notch, although it just posted a two-day rebound of better than 4%. Positive spin for Latin America can be hard to find. However, two things to keep in mind include the fact it found support this past week at its June and July lows and is now less risky than any other time in the past four years to establish a new position.

Hi Guys,
A few days ago Catch22 posted a request for a little help in constructing a portfolio for a retiring couple. The response was huge, literally a tidal wave of informed questions and excellent suggestions. That was somewhat surprising given the fact that the profile for the retiring couple indicated that they were relatively well healed, and, for the most part, had pretty much all their ducks in proper alignment.
This was not a problematic assignment, yet the enthusiasm was infectious. Retirement planning occupies every investors planning process at least one time. It is one of the seminal events in a lifetime. The decision itself and the decision making process are stressful but necessary exercises.
Although decision making is more art then science, most retirement planning experts favor examining multiple options and doing “what if” scenario drills. That’s because the future is so uncertain. The decision to finally pull the retirement trigger is often painful. Sometimes analysis paralysis adds to the discomfort. The saving news is that there are some nice resources nearby on the Internet.
The mathematical tool that is specifically designed to address uncertain outcomes is Monte Carlo simulations.
All the major mutual fund houses acknowledge the retirement decision tipping point and the mental anguish it precipitates. They have reacted with free excellent Monte Carlo-like planning tools. That’s good.
I know, I know you’re saying” there he goes again”. That’s true. But within the last month I discovered a “better” Monte Carlo tool. I promise this is the last such posting (well at least for a few weeks).
Some investors are predisposed against statistical analyses, especially Monte Carlo techniques. It is perceived as far too mathematical, too exotic, too sophisticated. Nonsense; you need not know how to build a car to use it. There is financial risk to such ruinous behavior. The mathematics and the random selection of parameters is not conceptually complex; it is quite simple.
If that’s true you might ask, then why is the method not more commonly applied? The answer is that it is, especially since the proliferation of the home computer.
The speed of the modern computer allows the simple procedure to be executed thousands of times while a labor intensive pencil-and-paper approach could only evaluate a single scenario. The particular code that I will recommend does 10,000 random cases for each situation specified. Decision making teachers all endorse multiple option explorations over limited examinations. That’s the beauty and primary advantage of Monte Carlo simulations.
There is a large and constantly growing band of brothers who are recognizing its benefits and applying the Monte Carlo approach. It is a specifically suited tool for exploring uncertain events to estimate probabilities. The expanding field of advocates are found in the Mathematics, Physical Sciences, Computational, Engineering, Business, Financial, and Retirement Planning communities. From its limited World War II era introduction, it is now a ubiquitous tool.
In an uncertain environment, having some formal procedure to estimate the success odds of any project and its options is of paramount importance.
As behavioral researchers Belsky and Gilovich remarked: “Odds are, you don’t know what the odds are”. In some sense, investing is a form of gambling. Award winning economist Paul Samuelson cautioned that “It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office”. However, investing is not a Zero-Sum game. Odds can be tilted to favor the patient, prudent, and informed player.
The recently discovered superior Monte Carlo simulator is from Flexible Retirement Planner. Please consider exploiting this especially useful aid to the retirement decision process:
http://www.flexibleretirementplanner.com/wp/
or more directly to the simulator itself:
http://www.flexibleretirementplanner.com/wp/planner-launch-page/
It is very fast, very flexible, and very worth a visit. This particular Monte Carlo code was written by an experienced, practical, retirement specialist. The calculator’s organization clearly demonstrates the benefits of his hands-on experience.
Monte Carlo analyses are the only investment tool that yields a reasonable estimate of the odds for a successful retirement. It certainly is not perfect, but it is far better than a crystal ball. By using it to explore various retirement and investment options, a candidate retiree can adjust his plans to improve his performance.
Understand that Monte Carlo codes never guarantee 100 % accuracy. That’s impossible in an uncertain world full of unknowable Black Swan happenings.
Many industry specialists suggest that retirement be delayed until Monte Carlo simulations forecast a 95 % success likelihood. That means that there is a 5 % possibility of portfolio bankruptcy. There will always be residual risk in retirement. A parametric Monte Carlo analyses helps a candidate retiree to identify and to minimize that risk, not entirely eliminate it.
In some instances, the stock market will turn sour shortly into retirement. That is unfortunate but not fatal. Those retiring just before 2008 suffered that nightmare. No mechanical tool, no soothsayer could have forecasted that scenario. Don’t indiscriminately scapegoat the analytical tool for the Black Swan physical happening.
Please take advantage of this outstanding resource. It will be both a learning experience and an opportunity to assess your portfolio’s survival odds. Also, I suggest you do a few “what-if” exploratory cases to examine potential pitfalls and improvements. The referenced code makes that an easy chore.
Good luck guys. Some folks might even perceive running these codes as fun.
Anyway, I have fun making the Monte Carlo case. I shall now go quietly and happily into the night.
Best Regards.

Reply to @Maurice:

The investing landscape is always changing. I never thought that our government would conspire to keep interest rates artificially so low and for so long. So I have failed in some ways, because I failed to fully adapt to this macro environment. Though I did stay invested in mostly bonds in my 401k account, until a couple months ago. While we try to learn from mistakes, those new learnings don't always apply in the future. Markets can be fixed, and Goldman Sachs is not about to share their wisdom with me.

Hi Mo. The fact that the interest rates have kept low and prevented from going up is why you were able to keep your bonds. Otherwise, you would experience the losses so much more earlier.