Fidelity Contrafund vs Vanguard Total Stock Index Fund

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Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Bdog93 » Tue Aug 28, 2012 3:19 am

Okay, I know the" bogelhead way" involves using mostly index funds but...
I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio? Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Boglenaut » Tue Aug 28, 2012 3:56 am

Now pretend it is 2000 and do the same analyses for Magellan. Remember when Magellan could do no wrong? Here is where you'd be.

(for all of these, view for longest time period possible...wish this chart went back to 1985 or so):

http://stockcharts.com/freecharts/perf.html?VTSmX,FMAGX

Also, Contra has international, etc. It's a different risk profile. Apples to Oranges.



By your logic, one should just put it all in VGSIX (Vanguard REIT):

http://stockcharts.com/freecharts/perf. ... CNTX,vgsix
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Johm221122 » Tue Aug 28, 2012 4:00 am

Nobody knows future, it may or may not beat index in the 10 years. But the index guarantees you will get market returns.If we knew future returns we would all pick the one with best return
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby jimkinny » Tue Aug 28, 2012 6:29 am

I think most readers of this forum would agree that investment risk drives returns, both negative and positive returns. The more risk, the more potential returns and losses. There is some skill, but the vast majority of investors do not have the knowledge, time and ability to outperform other naive investors. So then we hope that we can select those professional managers that can out perform based upon skill.

Unfortunately the data indicate that even most professional fund managers can not out perform over the long term enough to over come the costs of owning actively managed funds. It seems that top performer in year one is likely to be the bottom performer in year two. There is no way to predict who will be the fund manager of the year, in one year or 10 years from now. When funds write that past performance does not predict future performance etc......you should consider that as truth in advertising because it is accurate.

If you want to move beyond looking at 1,5 and 10 year fund performance and start to understand what is going on, then read some of the Boglehead recommended books or spend time on the Boglehead Wiki.

The Boglehead Wiki is a great resource and often unfortunately overlooked on this forum.

Since risk is at the heart of the matter, here is a link to the Boglehead Wiki discussion of risk
http://www.bogleheads.org/wiki/Risk_and ... troduction
[url][/url]

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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby livesoft » Tue Aug 28, 2012 6:36 am

Here is a previous discussion on the same subject of Contra vs other fund that you will find interesting to read:
viewtopic.php?f=1&t=94240
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Call_Me_Op » Tue Aug 28, 2012 6:41 am

Bdog93 wrote:Okay, I know the" bogelhead way" involves using mostly index funds but...
I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio? Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!


You can always find a fund that beat a given index looking backward. But this is not relevant to the future.
Last edited by Call_Me_Op on Tue Aug 28, 2012 7:57 am, edited 1 time in total.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby shipwreck » Tue Aug 28, 2012 6:43 am

Most of that gain in the Contrafund is probably from Apple. I think its about 9% of the fund the last time I looked.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby nisiprius » Tue Aug 28, 2012 7:50 am

Bdog93 wrote:Okay, I know the" bogelhead way" involves using mostly index funds but...
I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio?
It does. Stated returns and growth charts are always after expenses, i.e. what you'd hope.
Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...
What you're missing here is that ten years is in fact not enough. It just isn't. Hard to believe, I know, but true. That is why they have to say "past performance is no assurance of future results." You are right at the core of the active-versus-passive debate. The actively-managed funds you hear about, the ones that are in 401(k) funds, are all like Contrafund. They all have really significantly higher return than the index. They all look as if they have a "track record," and supporters always say "it can't be just a fluke, this is proof that there really are managers who can identify underpriced stocks."

The big gotcha is that there are 7,000 or so mutual funds out there, and you only hear about the ones that are like Contrafund.

The thing that is astonishing to me is how very quickly people forget and edit their memories when an active fund goes bad. Do the names "Bill Miller" and Legg Mason Value Trust mean anything to you? Five years ago, Miller would have been the proof that there is such a thing as skill. Miller was universally lionized as a brilliant value investor who beat the S&P fifteen years in a row. People wrote books about him: "The Man Who Beats the S&P: Investing with Bill Miller." Reporters wanted to know his opinions on everything financial. Then his fund collapsed. In just three years, it lost back all the gains it had made over the S&P. True, someone who invested in the fund just before the run-up would, in fact, be no worse off than in the S&P, but no better either. However, the vast majority of the investors and dollars that flowed into the fund did so when it was high.

If I can give a reason why track records are misleading... if you look closely at funds that have outperformed, you almost always see the same thing: the performance is bursty. You never see the fund just steadily pulling ahead year after year. What you typically see are periods of outperformance that last two or three years. In the case of Contrafund (FCNTX), comparing it against the Vanguard 500 Index fund (VFINX) (because Total Stock doesn't go back far enough), what I see by eyeball--not a formal analysis--is that there are really just two fairly periods during which FCNTX is widening the lead over VFINX. And the last one was five years ago, so it's included in the ten-year results.

Image

The burstiness doesn't mean the outperformance isn't real, but it does mean that you'd need an awfully long track record to be sure. Let's say you get an upward or downward burst every five or ten years or so. And make no mistake about it, you do get downward bursts, too, but you don't see those funds in your 401(k)'s because they get tossed out--after they happen. Well, if that's the pattern, then the funds that have happened to have a upward burst in the past ten years look good. FCNTX, to be sure, has had two.

There's another pattern you need to be aware of, though I'm not sure it applies to Contrafund. Many "legendary" funds, such as Fidelity Magellan, had their best years in the beginning when the fund was small and nobody had heard of them. Then their growth calls attention to them, the fund becomes famous, and everyone piles in. Often, the people who pile in don't do either particularly well or particularly poorly, but the point is that the reputation was earned for performance at a time when nobody knew about the fund and few people were in it. Contrafund is an $80 billion fund now, and there is a recognized issue with size. As the size of a fund increases, it becomes increasingly difficult for any fund to be terribly different from the index.

Now make no mistake about it: it is quite possible that Contrafund's outperformance could continue, so you really really really need to make your own decision and not let anyone talk you into it. If you went for Total Stock instead of Contrafund and Contrafund continued to do well, you'd hate me.

But I'll say this much it can be shown that "investing in whatever fund had the highest return over the last ten years" does not work. Outperformance does not persist. Morningstar itself has acknowledged that its famous star ratings have no predictive value.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby YDNAL » Tue Aug 28, 2012 8:08 am

Bdog93 wrote:Okay, I know the" bogelhead way" involves using mostly index funds but...
I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio? Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!

It's not that complex.
    1. Yes, managed mutual funds can outperform an Index.
    a) First, use the proper Index since FCNTX has ~10% Foreign at 6/30/12.
    b) Second, look a lot closer under the hood (below).
    2. FCNTX has 32% invested in Top 10 Stocks and 9% invested in Apple Computers.
    3. Find the right incredients for the NEXT 10 years and you have a winning combination that outperforms. Can FCNTX's managers deliver? Can there be a guarantee?
If you believe #3 is a slamdunk, then use 90% of your domestic Stock allocation in FCNTX.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby mhc » Tue Aug 28, 2012 9:22 am

OP,

here is an interesting article on active vs. passive investing. It is written by one of the contributors to this forum (Rick Ferri).

http://www.rickferri.com/blog/investmen ... -superior/
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby johnep » Tue Aug 28, 2012 9:43 am

I own total stock market index (VTI) and other passive funds but also own Contra. It is a very good fund that has beaten the index for a long time. Will it continue to do so? Who knows but Danoff may be one of those rare managers who can outperform the market. He has so far.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby dbltrbl » Tue Aug 28, 2012 10:16 am

I have owned contra before even Will Danoff was manager. But it was dumb luck before I learned hard way that you cant predict future. Yes I still have contra but all new money goes in index. I also had enviornmental funds and bridgeway and Vanguard US Growth if any one remebers it? They even changed the name. :D Bottom line you make the call. Index guaranteed vs who know? up or down depending on time frame.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Whatyear? » Tue Aug 28, 2012 12:59 pm

I also own Contrafund in my 401K and have for years. As a consequence, I need to hold balanced funds in my taxable (Vanguard) account to achieve the right asset aolloation. I've often thought of selling Contrafund in the 401K and replacing it with bond funds, then buying something similar to Contrafund in the VG account. But is there a VG fund that is reasonably similar to Contrafund? I know I can and should do the research, but after seeing this post I thought maybe someone else already has and would be willing to share their findings :happy .

Thanks,
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Past Performance ?

Postby Taylor Larimore » Tue Aug 28, 2012 1:23 pm

Bdog93 wrote:Okay, I know the" bogelhead way" involves using mostly index funds but...
I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio? Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...


Bdog93:

Welcome to the Bogleheads Forum!

Am I missing something here.


Yes, you are "missing something here." Instead of a lengthy explanation, take the advice of investment experts:
Jack Bogle: "In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Barra Research: "There is no persistence of equity fund performance."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Wm. Bernstein, author: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Jonathan Clements, author & columnist: "Trying to pick market-beating investments is a loser's game."

Eugene Fama: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Gensler & Bear, authors: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Burton Malkiel, author: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to underperformance in the subsequent period."

After fifteen straight years beating the S&P 500 Index, Bill Miller's Legg Mason Value Trust (LMNVX) is now (Aug. 2011) in the bottom 1% of its category for 10-year returns .

Ron Ross, author: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."

Bill Schultheis, author: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."

Larry Swedroe, author: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, authors: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author: "If you had invested in the annual #1 top performing stock and bond funds over the last 15 years, 80% of those top performers subsequently performed worse, over the next 3-10 years, than the average fund in their peer group! Two of three former #1 funds are actually the worst performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. Ten year's later, In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund during the prior 10 years.

Vanguard U.S. Growth had the 2nd BEST 10-year return of all Vanguard funds in December, 1998. On December 31, 2005 U.S. Growth had the 2nd WORST 10-year return of all Vanguard funds.

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Jerilynn » Tue Aug 28, 2012 4:23 pm

Bdog93 wrote:I was noticing that the Fidelity Contrafund has a 10 year return of 9%. ( Compared to 6% for the Vanguard Total Stock Index Fund). I realize the expense ratio on the Fidelity fund is much higher ( 0.81% vs 0.16% or even lower for the admiral shares of the Vanguard fund) but doesn't this 3% additional return offset the higher expense ratio? Or am I missing something here? Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!

If contra has a 10-yr return of 9% and TS is 6%, that is enough rational for me to sell the contra and buy Total Stock. Remember, buy low, sell high.

If you buy the actively managed funds that did well in the past X years, you are by definition buying high. (and then for most people, when it fails to keep up with past performance, people sell it. By definition you are selling low.

Also, 0.81% ER vs 0.16% is not trivial.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby awval999 » Tue Aug 28, 2012 5:05 pm

Bdog93 wrote: Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!


It's not a fluke. It's a combination of luck and skill. I used to own Contrafund before I learned the about passive investing solely because of the track record.

1. You can't buy the past performance
2. The size of Contrafund is so large now that it's an index fund mirror

I believe Danoff has skill and if he called me up and asked me to buy into a hedge fund he was starting up with only 0.86% fees and he said he was limiting the AUM to $10MM and would be personally managing the fund I would do it in a heartbeat. Of course this will never happen. Danoff and Fidelity are happily making 0.86% on $80B and coasting on their past performance.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby agill99 » Tue Aug 28, 2012 5:22 pm

Here's my .02.

I'm relatively new to the Bogle way, and I have tried to convince my wife that it is better than MY old approach. She has a big holding of Contrafund in her 403(b). I never have a good argument to convince her to switch to an index fund because Contrafund's returns have been better than its class, even if it has a higher ER.

So I had to do some research and comapre Contrafund to others growth funds. If you look more closely, Contrafund has the same performance as other large-cap growth index funds (VIGRX) over the last 5 years. Now I know that that is a short time to compare, but if you look at the last 20 years Contrafund only outperformed the benchmark or an index fund in about 5 years (in 2002 to 2005 and again in 2007 to 2008). It is impossible to exactly say WHY it outperformed in those periods (skill, luck, timing, etc), it is clear that its better returns is due only to those times.
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby Jerilynn » Tue Aug 28, 2012 11:26 pm

awval999 wrote:
Bdog93 wrote: Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!


It's not a fluke. It's a combination of luck and skill.


I disagree. It's all luck.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Fidelity Contrafund vs Vanguard Total Stock Index Fund

Postby awval999 » Tue Aug 28, 2012 11:50 pm

Jerilynn wrote:
awval999 wrote:
Bdog93 wrote: Ten years seems like a long enough track record that this return is not just a fluke...


Thanks!


It's not a fluke. It's a combination of luck and skill.


I disagree. It's all luck.


Agree to disagree. :sharebeer

Regardless my comments still stand. You cannot buy the past performance. And the larger a fund gets the more difficult it is to outperform the market, in the end large funds end up tracking the market.
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