Fund Advice from Advisor - S&P500 Performance

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Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 1:24 pm

Hey folks,

John here, first time poster. I'm trying to discern if what my financial advisor at Merrill Edge is telling me is accurate regarding a specific fund's performance vs the S&P - taking into account the expense ratio.

May I ask, does this performance graph take into account annual expenses? My advisor says after expenses this fund (along with 3 others he's recommending) outperforms the S&P. C class shares are available with no front end load, and no back end load if i keep it for over a year.

How would a Boglehead interpret this information? Many thanks for your input - wrapping my head around this stuff.

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Re: Fund Advice from Advisor - S&P500 Performance

Postby dbr » Fri May 10, 2013 3:09 pm

The interpretation is that the mid-cap value asset class is not what is represented by the S&P 500 which holds 5% in mid cap value and 14% in midcap altogether. Your fund holds 23% in mid cap value (it is hardly a mid cap value fund at all) and 63% in mid cap. You can go here to see these things:

http://portfolio.morningstar.com/RtPort ... =0.7055475

Benchmarking against an irrelevant index that does not have the same expected risk and expected return is one of the oldest tricks in the book of fund salesman misinformation.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Savvy » Fri May 10, 2013 3:13 pm

Ask him to sign a piece of paper saying that this fund will outperform the S&P 500 in the future and that if is doesn't he will be financially liable. If he won't sign it, ask him why not.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Bogle101 » Fri May 10, 2013 3:16 pm

Obviously a mid cap fund will outeperform the S&P 500 over some time periods. He is not highlighting the extra risk that comes with smaller capitalization stocks. But other than that, he seems like a cool guy.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Investing is boring » Fri May 10, 2013 3:23 pm

Bogle101 wrote:Obviously a mid cap fund will outeperform the S&P 500 over some time periods. He is not highlighting the extra risk that comes with smaller capitalization stocks. But other than that, he seems like a cool guy.


A cool guy making a nice commission on that outrageous 1.75% expense ratio, by shoving miss-information in your face by comparing mid-cap fund to an irrelevant index. Awesome. [Offensive remark removed by admin LadyGeek]
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Grt2bOutdoors » Fri May 10, 2013 3:32 pm

I'd drop this guy like a hot potato for two reason 1 - Using the wrong benchmark to compare performance. That is like comparing a Maserati's performance to a Honda Accord. 2 - Insulting your intelligence - basically your financial advisor who should be performing a service for you is actually performing a disservice by trying to mislead you. Now, the two reasons why he's trying to sell you on the investment - 1) if he sells enough of it, he'll get on the good graces side of the JP Morgan fund wholesaler who will then provide him with the hottest NHL tickets out there today for the Rangers game and 2) his bank account is looking a little empty and he needs some money so he can book his vacation to Tahiti for him and his girlfriend.

Is he licensed? Report him to FINRA - they have a reporting tool online for providing a disservice. Drop a line to the CEO of BofA who this guy ultimately works for - ask the CEO why they are providing this disservice and demand some action. Squeaky wheels helps to get answers. Oh, and don't tell the FA you are doing it - just do it and then yank your business.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Grt2bOutdoors » Fri May 10, 2013 3:34 pm

Investing is boring wrote:
Bogle101 wrote:Obviously a mid cap fund will outeperform the S&P 500 over some time periods. He is not highlighting the extra risk that comes with smaller capitalization stocks. But other than that, he seems like a cool guy.


A cool guy making a nice commission on that outrageous 1.75% expense ratio, by shoving miss-information in your face by comparing mid-cap fund to an irrelevant index. Awesome. [Offensive remark removed by admin LadyGeek]


How is a fee level of 1.75% - classified as "LOW"? That is outrageously HIGH!!!
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Grt2bOutdoors » Fri May 10, 2013 3:38 pm

dbr wrote:The interpretation is that the mid-cap value asset class is not what is represented by the S&P 500 which holds 5% in mid cap value and 14% in midcap altogether. Your fund holds 23% in mid cap value (it is hardly a mid cap value fund at all) and 63% in mid cap. You can go here to see these things:

http://portfolio.morningstar.com/RtPort ... =0.7055475

Benchmarking against an irrelevant index that does not have the same expected risk and expected return is one of the oldest tricks in the book of fund salesman misinformation.


The correct benchmark is VOE - MidCap Value ETF - YTD Return is 18.36% YTD return of the JP Morgan Fund is: 14.74%. Nice try.....you've been rejected Merrill Lynch. Have a nice day! :happy
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Blues » Fri May 10, 2013 3:41 pm

Don't walk, run! :oops:
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Random Musings » Fri May 10, 2013 4:41 pm

Merrill Edge - who do you think is getting the "edge" with a 1.75% load?

Hopefully, the door will hit his arse on the way out. If not, please make sure it does for me.

As a Boglehead, I would fire him, then do your own reading and research to decide whether you want to be a DIY or utilize a low-cost ethical advisor.

Take your time (except for the firing part).

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Re: Fund Advice from Advisor - S&P500 Performance

Postby InvestorNewb » Fri May 10, 2013 5:05 pm

What a joke... comparing apples with oranges.

It's reasons like this why I don't bother with fund managers.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby momar » Fri May 10, 2013 5:11 pm

I would ask him about this chart:

The orange shows Vanguard's Mid Cap Index, the Blue is the JP Morgan Mid Cap Value C.

I chose the Mid Cap Index instead of the Mid Cap Value because the JP Morgan fund is barely a value fund at all.

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Re: Fund Advice from Advisor - S&P500 Performance

Postby Blues » Fri May 10, 2013 5:42 pm

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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 5:44 pm

Folks - I believe I've completely misrepresented what I meant to communicate, so let me set the record straight on my end...

He actually selected these funds stating they outperformed Vanguard Total Market Fund (VTSMX I believe) over 10 years - why I twisted that around and showed it vs. the S&P500 I can only assume is a rookie brainfart.

That said, it doesn't change the calculus at all, right? As far as risk-adjusted returns go, a VTSMX/VINIX is what a Boglehead will lean toward vs any of these higher-expense funds, correct?
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Re: Fund Advice from Advisor - S&P500 Performance

Postby momar » Fri May 10, 2013 5:49 pm

jstar32 wrote:Folks - I believe I've completely misrepresented what I meant to communicate, so let me set the record straight on my end...

He actually selected these funds stating they outperformed Vanguard Total Market Fund (VTSMX I believe) over 10 years - why I twisted that around and showed it vs. the S&P500 I can only assume is a rookie brainfart.

That said, it doesn't change the calculus at all, right? As far as risk-adjusted returns go, a VTSMX/VINIX is what a Boglehead will lean toward vs any of these higher-expense funds, correct?

No, it doesn't.

It is legitimate to own separate Mid and/or Small cap funds, many here tilt to them. But there is no reason to own ones that charge a fee like that; if you want to own a Mid Cap fund, own a Mid Cap index.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby leonard » Fri May 10, 2013 5:50 pm

Why would we compare a Mid Cap Value fund against the S&P 500?
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Re: Fund Advice from Advisor - S&P500 Performance

Postby dickenjb » Fri May 10, 2013 5:50 pm

jstar32 wrote:May I ask, does this performance graph take into account annual expenses? My advisor says after expenses this fund (along with 3 others he's recommending) outperforms the S&P.


You got the tense of the verb wrong - it outperformed in the past. As others have pointed out, it is the wrong index. Anyone can pick a fund or sector that outperformed the broad market or LC blend in the past. No one can reliably pick sectors which will outperform in the future.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 5:58 pm

Thanks one and all. I'm pretty sure from here its the KISS method - the "3 Fund Portfolio", just a matter of selecting allocations.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Blues » Fri May 10, 2013 6:16 pm

jstar32 wrote:Thanks one and all. I'm pretty sure from here its the KISS method - the "3 Fund Portfolio", just a matter of selecting allocations.


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Re: Fund Advice from Advisor - S&P500 Performance

Postby SkierMom » Fri May 10, 2013 6:33 pm

John...I like perusing the Boglehead board for "Advisor" questions every now and then, just for the expense ratio humor.

Thanks for posting! :sharebeer
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Re: Fund Advice from Advisor - S&P500 Performance

Postby pkcrafter » Fri May 10, 2013 6:38 pm

Just so we cover everything that's wrong--
C class shares are available with no front end load, and no back end load if i keep it for over a year.


You, or he, makes this sound like a good deal, no front or back end load, BUT this advisor is giving you no deal. C shares are by far the worst because they carry an ongoing 1% load embedded in the expense ratio. An expense ratio of 1.75 all but guarantees poor performance over time.

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Last edited by pkcrafter on Fri May 10, 2013 7:39 pm, edited 1 time in total.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Call_Me_Op » Fri May 10, 2013 6:41 pm

Instead of listening to this or any advisor, I recommend that you educate yourself on investing.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby MN Finance » Fri May 10, 2013 6:55 pm

Just to clarify. There is good reason to potentially own funds of various asset classes. The reason is that those funds can have a positive impact on risk / return in a portfolio. Many of "those" asset classes indeed outperform the S&P, in fact the S&P is one of the lower performing classes of the market itself. If someone is making a statement that a mid cap fund out performed, one valid reason is because of the types of stocks. It's not because within that segment of the market, the fund in question has any particular advantage or knows how to pick the best stocks. So, building a portfolio of various classes is valid. Then it comes down to choosing which fund gives you the best exposure to that class. Clearly losing 1.75% per year to fees will eventually result in poor performance results when compared to the appropriate index. This is the underlying reason why people focus on choosing a low cost index fund itself.

I disagree entirely with spending your valuable time trying to report this behavior to any governing body. First, being held to a suitability standard is pretty low so there's nothing legally off here (though obviously morally questionable when comparing to the high standards self imposed by this group.) Second is that you have no case and won't win. If you decide not to continue with the advisor, just leave and say no thanks.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Toons » Fri May 10, 2013 7:00 pm

Regarding 1.75% expense ratio and the corrosive effect it can have on the compounded return on YOUR money,plug some expense ratio numbers in the link below and it won't take long for you to realize how
much money is being siphoned off to the fund company slowly but surely over time :happy

http://www.calcxml.com/calculators/inv12?skn=#top
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 7:36 pm

Toons wrote:Regarding 1.75% expense ratio and the corrosive effect it can have on the compounded return on YOUR money,plug some expense ratio numbers in the link below and it won't take long for you to realize how
much money is being siphoned off to the fund company slowly but surely over time :happy

http://www.calcxml.com/calculators/inv12?skn=#top



That was one of the questions I had about the chart - it doesn't show the compounding negative effect of that expense ratio, correct?
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 7:39 pm

pkcrafter wrote:Just so we cover everything that's wrong--
C class shares are available with no front end load, and no back end load if i keep it for over a year.


You, or he, makes this sound like a good deal, no front or back end load, BUT this advisor is giving you no deal. C shares are by far the worst because they carry an ongoing 1% load embedded in the expense ratio. An expense ratio of 1.75 all but guarantees poor performance over time.

Paul


Nice information, thanks Paul!
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Re: Fund Advice from Advisor - S&P500 Performance

Postby leonard » Fri May 10, 2013 7:51 pm

MN Finance wrote:Just to clarify. There is good reason to potentially own funds of various asset classes. The reason is that those funds can have a positive impact on risk / return in a portfolio. Many of "those" asset classes indeed outperform the S&P, in fact the S&P is one of the lower performing classes of the market itself. If someone is making a statement that a mid cap fund out performed, one valid reason is because of the types of stocks. It's not because within that segment of the market, the fund in question has any particular advantage or knows how to pick the best stocks. So, building a portfolio of various classes is valid. Then it comes down to choosing which fund gives you the best exposure to that class. Clearly losing 1.75% per year to fees will eventually result in poor performance results when compared to the appropriate index. This is the underlying reason why people focus on choosing a low cost index fund itself.

I disagree entirely with spending your valuable time trying to report this behavior to any governing body. First, being held to a suitability standard is pretty low so there's nothing legally off here (though obviously morally questionable when comparing to the high standards self imposed by this group.) Second is that you have no case and won't win. If you decide not to continue with the advisor, just leave and say no thanks.


There's a difference between slicing and dicing AND benchmarking against the wrong index. Is that what your saying?
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Re: Fund Advice from Advisor - S&P500 Performance

Postby 2retire » Fri May 10, 2013 7:59 pm

jstar32 wrote:That was one of the questions I had about the chart - it doesn't show the compounding negative effect of that expense ratio, correct?

Incorrect. Morningstar charts show the performance after all fund fees (ER and trading costs).
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 8:00 pm

MN Finance wrote:Just to clarify. There is good reason to potentially own funds of various asset classes. The reason is that those funds can have a positive impact on risk / return in a portfolio. Many of "those" asset classes indeed outperform the S&P, in fact the S&P is one of the lower performing classes of the market itself. If someone is making a statement that a mid cap fund out performed, one valid reason is because of the types of stocks. It's not because within that segment of the market, the fund in question has any particular advantage or knows how to pick the best stocks. So, building a portfolio of various classes is valid. Then it comes down to choosing which fund gives you the best exposure to that class. Clearly losing 1.75% per year to fees will eventually result in poor performance results when compared to the appropriate index. This is the underlying reason why people focus on choosing a low cost index fund itself.

I disagree entirely with spending your valuable time trying to report this behavior to any governing body. First, being held to a suitability standard is pretty low so there's nothing legally off here (though obviously morally questionable when comparing to the high standards self imposed by this group.) Second is that you have no case and won't win. If you decide not to continue with the advisor, just leave and say no thanks.


Many thanks for the thoughtful reply MN, especially about asset class diversification and risk/return - much appreciated!

May I ask your thoughts about the "3 fund portfolio" in regards to assessing risk/return vs. studying up on a potential portfolio of other varied index fund asset classes? I do have the book "The Intelligent Asset Allocator" - would this be heading in a right direction?
Last edited by jstar32 on Fri May 10, 2013 8:02 pm, edited 1 time in total.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Fri May 10, 2013 8:01 pm

2retire wrote:
jstar32 wrote:That was one of the questions I had about the chart - it doesn't show the compounding negative effect of that expense ratio, correct?

Incorrect. Morningstar charts show the performance after all fund fees (ER and trading costs).


Thanks much for the clarification.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby lwfitzge » Fri May 10, 2013 8:53 pm

1) first, apples vs oranges , different asset classes, different benchmark indexes and different risk premia... nice comparison w that shell game, NOT.
2) even if he showed you a lg cap blend that beats SP500 ... past performance does predict future, ask him if he sees the future! If he does, ask him to guarantee it!
3) compare performance of like funds after removing sales load and expense ratios.....
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Re: Fund Advice from Advisor - S&P500 Performance

Postby LadyGeek » Fri May 10, 2013 8:59 pm

jstar32 wrote:May I ask your thoughts about the "3 fund portfolio" in regards to assessing risk/return vs. studying up on a potential portfolio of other varied index fund asset classes? I do have the book "The Intelligent Asset Allocator" - would this be heading in a right direction?

That would be a step in the right direction. Take your time and do some reading, which should include the wiki: Getting Started

You have lots of choices, but the first thing you should pick is your Asset Allocation, which is the single most important decision you will make. Then, you choose the funds to make up your portfolio.

The Three-fund portfolio is one of many Lazy Portfolios.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby grabiner » Fri May 10, 2013 9:55 pm

pkcrafter wrote:Just so we cover everything that's wrong--
C class shares are available with no front end load, and no back end load if i keep it for over a year.


You, or he, makes this sound like a good deal, no front or back end load, BUT this advisor is giving you no deal. C shares are by far the worst because they carry an ongoing 1% load embedded in the expense ratio. An expense ratio of 1.75 all but guarantees poor performance over time.


And this is an example of provably poor advice. How long does the advisor expect you to stay in this fund or other JPMorgan funds? If the answer is more than ten years (which is what you would want to do for a stock investment), then C shares are guaranteed to underperform A shares or B shares.

The first "advisor" (a free consultant from a bank) I talked to made the same mistake; he recommended Templeton Growth as a long-term investment based on its long-term performance record, and then recommended C shares, which I quickly realized were guaranteed to underperform A shares if held for over eight years. This blew his credibility because it was provably wrong, and led me to investigate on my own and find Vanguard International Growth instead (which was much better, although still wrong for tax reasons).
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Re: Fund Advice from Advisor - S&P500 Performance

Postby LadyGeek » Fri May 10, 2013 10:19 pm

Further clarification of share classes is in the wiki: Mutual fund

It references an article from the SEC: Invest Wisely: An Introduction to Mutual Funds, under "Classes of Funds":

Class C Shares — Class C shares might have a 12b-1 fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Unlike Class B shares, Class C shares generally do not convert to another class. Class C shares tend to have higher annual expenses than either Class A or Class B shares.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby EyeYield » Fri May 10, 2013 10:25 pm

A closer apples to apples comparison.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

I'd go with the .28 ER, a better yield and over all performance.

These full service guys are trying to make money for their shareholders (public companies), the house and themselves, with the investor getting what's left over.
The way it works is with incentives. The higher the expense ratio, the more liquidity the fund manager has to offer incentives. The brokers at Merrill get emails everyday from fund managers looking to increase their AUM and are willing to add to the brokers commission and the brokers house too. These guys will NEVER recommend an index fund, because there's no incentive to.

Now if you really like the guy and think he deserves a tip or a yacht upgrade, then by all means let him pick some funds for you. You'll feel a lot better for him if you do.
(I'm only half kidding, because I know people that would rather pay anything than have even a mild confrontation.)

EDIT: Actually Vanguard Mid Cap Value index ETF - VOE has an even lower ER, which is reflected in it's over all performance.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby HongKonger » Sat May 11, 2013 12:39 am

Blues wrote:Image

"The tribe has spoken!"



The best laugh I have had all week. Thank you.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Sat May 11, 2013 2:06 am

EyeYield wrote:The way it works is with incentives. The higher the expense ratio, the more liquidity the fund manager has to offer incentives.


That make sense to me - many thanks...
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Sat May 11, 2013 2:09 am

Call_Me_Op wrote:Instead of listening to this or any advisor, I recommend that you educate yourself on investing.


I agree. That's why I came to this forum to post a question.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Sat May 11, 2013 2:26 am

LadyGeek wrote:Further clarification of share classes is in the wiki: Mutual fund

It references an article from the SEC: Invest Wisely: An Introduction to Mutual Funds, under "Classes of Funds":

Class C Shares — Class C shares might have a 12b-1 fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Unlike Class B shares, Class C shares generally do not convert to another class. Class C shares tend to have higher annual expenses than either Class A or Class B shares.


Thank you.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby jstar32 » Sat May 11, 2013 2:28 am

LadyGeek wrote:
jstar32 wrote:May I ask your thoughts about the "3 fund portfolio" in regards to assessing risk/return vs. studying up on a potential portfolio of other varied index fund asset classes? I do have the book "The Intelligent Asset Allocator" - would this be heading in a right direction?

That would be a step in the right direction. Take your time and do some reading, which should include the wiki: Getting Started

You have lots of choices, but the first thing you should pick is your Asset Allocation, which is the single most important decision you will make. Then, you choose the funds to make up your portfolio.

The Three-fund portfolio is one of many Lazy Portfolios.


Very helpful once again - thank you!
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Re: Fund Advice from Advisor - S&P500 Performance

Postby InvestorNewb » Sat May 11, 2013 9:01 am

EyeYield wrote:These guys will NEVER recommend an index fund, because there's no incentive to.


I remember when I met with a fund manager at a different bank many months ago, he showed me a list of their funds. One was an index fund and he also discouraged it by saying that the problem with index funds is that there is "nobody there to pick out the bad apples from the bunch".

Their index fund also had an expense ratio of about 1% - I almost feel bad for the people that don't know any better.

Thankfully I came here and educated myself on the topic.
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Re: Fund Advice from Advisor - S&P500 Performance

Postby Bogle101 » Thu May 16, 2013 11:20 am

Investing is boring wrote:
Bogle101 wrote:Obviously a mid cap fund will outeperform the S&P 500 over some time periods. He is not highlighting the extra risk that comes with smaller capitalization stocks. But other than that, he seems like a cool guy.


A cool guy making a nice commission on that outrageous 1.75% expense ratio, by shoving miss-information in your face by comparing mid-cap fund to an irrelevant index. Awesome. [Offensive remark removed by admin LadyGeek]


Hey, cool guys deserve that management fee!
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Re: Fund Advice from Advisor - S&P500 Performance

Postby shersch » Thu May 16, 2013 3:33 pm

One of my favorite broker tricks! It's hindsight bias at its best.

Something I like to do, also with Morningstar, is check the Fund Family [you'll see a little FF in red in the upper left of any mutual fund you look up]. Then plug in a Vanguard fund and do the same thing. This way, you're not cherry-picking, but capturing the total fund family's performance. You're not looking for the needle in the haystack -- you're looking for the haystack with the most needles.

This is what you get if you do that:

JP -- YTD 5.80% 3 Year 7.92% 5 Year 4.95%
VG -- YTD 8.26% 3 Year 10.32% 5 Year 5.66%

These numbers do include annual expense ratios, 12b-1 fees, and the like, but they do not include loads. Add in a hefty Class A admission price, and you're behind by that much more. Add in survivorship bias, which is almost certain to be worse for JP, and the picture gets uglier still.


Any one of us can go find funds that kicked the pants off of JCMVX. Should we invest in them? Not unless you think you're one of the lucky few. I don't know about you guys, but I guess I lack that confidence. What can I say?
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