UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Author: sdfewl One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 757751  
Subject: Index vs. Managed Funds Date: 3/3/2000 3:56 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
I've read the index vs. managed funds debate with some interest (no pun intended). After 3 years of poor performance, I recently fired my financial advisor and put in the time to have at least some understanding of the markets. Because of my work, I must invest in mutual funds. Therefore, as I took over my own investments, I had a decision to make. Do I go all index as the Fool recommends or do I venture out and risk continuing poor performance?

In my case, I decided to do both. I put almost half of my port in S&P 500 index and the remainder in various growth funds in several sectors (large cap, small cap, international, and biotech). Admittedly, this has only been going for a few weeks, but I've yet to post a loss and my port is beating S&P all over (even though it is almost 50% S&P).

I appreciate the research showing that 80%+ of the funds do not beat the market. But, I simply could not resist the temptation to go for some of the incredibly high returns offered by the growth funds in some sectors. I've decided that if 20% of the funds beat the market, then the challenge is to find those funds. In my case I looked for as long a track record as possible combined with the lowest costs. So far so good. My plan is to watch the funds carefully and if one slips to the second quartile of funds in its category (as reviewed by Morningstar) then to transfer my money (but with a 1 year holding time). Thus, I hope to always have most of my funds beating the S&P500.

Perhaps this is a pipe dream. But, with several funds posting 100%+ returns in 1999 and some with 50%+ returns so far in 2000, I can't resist the temptation to try to improve my returns with a "safety net" of the S&P500 to catch me if one or another sector crashes.

I hope it works!

SDFEWL
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: Daryll40 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5454 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 4:30 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
...with several funds posting 100%+ returns in 1999 and some with 50%+ returns so far in 2000, I can't resist the temptation to try to improve my returns with a "safety net" of the S&P500 to catch me if one or another sector crashes.

I hope it works!

SDFEWL


SDFEWL, your post scares the heck out of me! Not to beat you up, but it shows your thinking that the S&P, now trading at DOUBLE the historical P/E, is YOUR SAFETY NET! I have a LOT of SPY (the S&P index) myself but only as a part of a balanced portfolio including boring, treasury and municipal bonds. THOSE are MY safety net.

This market mania scares me...when someone thinks that the S&P is the SAFETY NET, I am REALLY scared (but remain invested 60/40 as no one really knows what will happen going forward, ever!)











Print the post Back To Top
Author: marimba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5455 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 4:45 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
sdfewl writes:
I appreciate the research showing that 80%+ of the funds do not beat the market. But, I simply could not resist the temptation to go for some of the incredibly high returns offered by the growth funds in some sectors. I've decided that if 20% of the funds beat the market, then the challenge is to find those funds.


Fans of mutual funds make me think of Seinfield routine where he tries to figure out why people root for certain sports teams. He decides that they are just cheering for a certain color of jersey. It's really true! For any given sports club, many of its fans are not from its home city, nor are its team members. The team does not practice in the home city. Many of the team members were not even on the team the previous year, nor do they reside in the home city. What's the common thread? The uniforms. When people pick a favorite team, they're choosing a favorite uniform.

The same is true of a mutual fund. You've got virtually no useful picking criteria, so basically you're picking a name that you like. Let's look at some of the criteria that fool people into thinking that you can pick a fund...

Historical returns? Track records? These are generally average-manipulated to make them look strong and stable. Past performance is generally a red herring, it does not indicate future performance. If you flip a quarter 9 times, and it comes up heads 9 times, what are the odds that it will come up heads on the next flip? 50%, just like the previous 9 flips.
You can bet that the fund managers are not picking their stocks based on past performance, so why would you?

Another picking criterion might be the management. Well and good, but what if the fund's management has a bad year? What if they get fired or quit the fund? You're back to ground zero as far as research is concerned.

What does that leave us...oh yes, some funds do publish the stocks that they hold. That's not much consolation, considering that they will sell 80% of those stocks within the year, and they won't tell you when they do it.

Mutual funds are kind of like dating in college...not really fun, not really rewarding, but everybody learns something in the process of wasting time. I know that's how it was for me.


Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: sdfewl One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5456 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 5:22 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
OK, Daryll40 is obviously much less risk tolerant than I am. I certainly respect that. But, I was joking about the S&P 500 being a "safety net." That's why I put it in quotes. We simply disagree on the need for bonds in a portfolio. If the movement of bonds was always the opposite of stocks, then I agree that you would want bonds to balance most of the time. But, bonds (and certainly bond funds) don't neatly track or opposite track stocks. Thus, while I am working I will put my port in stocks. They have the greatest likelihood of a decent return, period. When I retire, I will create a bond or CD ladder. But, just so you won't think I'm a complete raving lunatic, I'll also tell you that I also keep a chunk in cash (tax free money market).

Marimba's post is hard to read. It's hard to tell if he is saying that all mutual funds are bad or if all non-index funds are bad. Either way, I disagree with your conclusion that there is nothing upon which to predict future fund performance. It is easy to see if a fund manager has changed. If a fund manager has beaten the S&P for the the last 10 years, I believe that is a pretty good indication that under current market conditions he has the best likelihood of being in the 20% of funds that beat the market. Thus, past performance vis a vis a funds peers seems like a very useful piece of information. If a fund manager starts to fail, then he can be replaced. Are you simply saying that it is impossible to predict which mutual funds will be in the 20% that beat the market? You may be right, but I'm going to have fun trying . . .

SDFEWL

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: Chipsboss Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5461 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 6:24 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Thus, past performance vis a vis a fund's peers seems like a very useful piece of information.

I think that semblance of usefulness is misleading.

http://soundmindinvesting.com/feature/isthere.htm
Is There Predictive Value in the Long-Term Track Records of Mutual Funds? Excerpts "In addition to my research and that of Berry, the uselessness of five-year performance histories as guides to future performance has also been reported in articles in Investment Vision (June 1991) and Worth (November 1994)." . . . "In other words, more than two-thirds of the time, some of the best portfolio managers in the country (according to Forbes) failed to produce better returns than an unmanaged index fund."

http://www.investorhome.com/do Do Past Winners Repeat? Excerpt: "both equity and fixed income investors may be better served by investing in index funds as opposed to funds that have performed well in the past."

Chips, who always came up short when out to beat the market, and who retired within 12 years of abandoning that strategy



Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5462 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 6:30 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Chipsboss wrote,

Chips, who always came up short when out to beat the market, and who retired within 12 years of abandoning that strategy

<LOL> I don't own any index funds, but I agree that more and more people are coming to that conclusion. <grin>

interest

Print the post Back To Top
Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5464 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 6:39 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
I suppose it is possible to beat the market (S&P 500 or however else you might define the market) by picking actively managed mutual funds; I simply do not know how to do it. Even after some study on this subject some years ago; I couldn't see a clear strategy becuase, IMHO when you invest in mutual funds, you give up way too many advantages.

Conversely when investing in individual equities, IMHO it is not necessarily easy, but not that difficult to beat the market, as you can make a variety of advantages available to the small investor (even if you are worth $25mm; you are still a small investor) work to your advantage.

TheBadger


Print the post Back To Top
Author: NowInMaui One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5465 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 6:44 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3

Another element of index vs. managed fund. I know that the discussion so far is focused on funds held in a tax-deferred account. For those just starting their investment life, don't make the same mistake that I made.

When I was young and foolish, I relied on the Wise to help me make some investment decisions in a taxable account. I was steered to several managed funds, which I promptly invested in.

To my complete surprise and horror, at tax time I had an additional and significant tax burden with capital gains taxes owed for the churning of stock in the managed funds. Because we were in a high tax bracket it really hurt. I believe (it was some years ago) I paid far more in taxes than the fund's capital appreciation.

It was then that I adopted a Foolish philosophy and spent alot of time becoming wise. Got rid of the Wise, sold the mutual funds at a loss and switched to individual stocks in my taxable account. I only have index funds in my tax deferred account which is of equal value as my taxable account. I have acquired both QQQ and SPY for the taxable account in addition to the individual stock I hold in the account. Have kept the fees extremely low. NowInMaui

Print the post Back To Top
Author: Chipsboss Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5467 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 7:11 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
I don't own any index funds, but I agree that more and more people are coming to that conclusion

I appreciate the efforts other people put into security analysis while I do none. In fact, I depend on all this free, volunteer labor of people set on beating the market. <grin>

Above average results must, by definition, be in balance with below average results, provided we ignore transaction costs.

http://www.investorhome.com/emh.htm "The paradox of efficient markets is that if every investor believed a market was efficient, then the market would not be efficient because no one would analyze securities. In effect, efficient markets depend on market participants who believe the market is inefficient and trade securities in an attempt to outperform the market."

Chips, who usually has a quotation at the ready


Print the post Back To Top
Author: rustedSoul Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5473 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/3/2000 8:34 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1

Do I go all index as the Fool recommends or do I venture out and risk continuing poor performance?


When you compare the performance to a managed fund, be sure to compare funds of like investing strategy.

The funds that are up 100+% in 1999 are not diversified large cap funds. They are most likely funds that could be more accurately described as being sector funds (tech, comp, or bio). I think there are very few funds that maintain the same diversification of the S&P500 and still beat it over any significant amount of time.

These days you can buy spyders in each sector at a much lower cost than managed funds. When you compare the high flying managed funds to these sector index spyders, the list of managed funds that are exceptional is even smaller.

I myself don't currently invest in funds, though. When a fund can return 100+%, this indicates that many of the individual stocks are up 500-1000+%. I would rather spend some time to find these companies and buy them.

rustedSoul

Print the post Back To Top
Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5562 of 757751
Subject: Re: Index vs. Managed Funds Date: 3/5/2000 5:05 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Good Post MauiGuy,

I made same 'mistake' years ago when I first bought a an after-tax mutual fund. I did my research and picked the best (versus risk) and saw my earnings grow nicely (just under the S&P500 growth rate), but each year, I was hit with increasingly larger tax bills for realized capital gains from within the fund. I finally stopped having the dividend/capital gains reinvested, just so I could find some end-of-year cash to pay the tax bill for this and other smaller after-tax mutual funds. I'd sell these funds, but the capital gains hit would be huge right now, so I am feeling trapped into selling these funds off slowly so I don't move into a higher tax marginal rate.

If there is ever the 'Great Market Sell Off,' I expect this yearly taxable windfall will increase quite a bit as funds are liquidated by shareholders. Some of these funds have pretty big 'unrealized capital gains' sitting in their accounts and the tax bill new investors may eventually have to pay for their investement in these accounts may be the next big mutual fund scandal even if it does not happen for another 10 years.

Currently, my annual dividend/capital gain distributions from after-tax mutual funds is approaching what I would need to withdraw annually to support an early retirement.
Like you, if I had to do it all over again, this money would have gone into one of the index mutual funds. Now there are even better choices than there were 15 years ago, and, as you do, I currently recommend SPY and QQQ to co-workers adn friends asking me where to first invest new monies. Your control over capital gains distribution seems pretty good in these new indices.

As you say, for tax-deferred accounts, none of this seems to matter.

-- John

MauiGuy wrote:

Another element of index vs. managed fund. I know that the discussion so far is focused on funds held in
a tax-deferred account. For those just starting their investment life, don't make the same mistake that I
made.

When I was young and foolish, I relied on the Wise to help me make some investment decisions in a
taxable account. I was steered to several managed funds, which I promptly invested in.

To my complete surprise and horror, at tax time I had an additional and significant tax burden with capital
gains taxes owed for the churning of stock in the managed funds. Because we were in a high tax bracket
it really hurt. I believe (it was some years ago) I paid far more in taxes than the fund's capital
appreciation.

It was then that I adopted a Foolish philosophy and spent alot of time becoming wise. Got rid of the
Wise, sold the mutual funds at a loss and switched to individual stocks in my taxable account. I only have
index funds in my tax deferred account which is of equal value as my taxable account. I have acquired
both QQQ and SPY for the taxable account in addition to the individual stock I hold in the account. Have
kept the fees extremely low. NowInMaui
</i?

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Advertisement