Seeking Data comparing long term passive vs. managed funds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Seeking Data comparing long term passive vs. managed funds

Postby bobsmith » Fri Jan 25, 2013 9:47 pm

I'm a big believer in the whole Vanguard philosophy. I'm always trying to convince my friends and family to get into Vanguard as opposed to high-fee alternatives. I find it's hard to convince people about the benefits of investing in index funds verses managed funds. Seems like the nature instinct everyone has it that you have find a way to beat the market rather than just match it, cut your fees, and hold it for the long run. Well, you know what I'm talking about.

But what I'm really looking for is a good resource that lays out the comparison. Does anyone know if there's been a study or just a good article that compares long term investments and shows the benefit of index funds over managed funds? It's been a while since I've read Bogles book. Maybe there's something in there. Of course I'd prefer a good link or pdf. Any suggestions?

Thanks.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby larryswedroe » Fri Jan 25, 2013 10:09 pm

There are many studies, in fact pobably he most studied area in finance.
If interested in summary of the data citing many studies try my book The Quest for Alpha, covers mutual funds,VC, hedge funds, pension plans and individual investors
Best wishes
Larry
larryswedroe
 
Posts: 11701
Joined: Thu Feb 22, 2007 9:28 am
Location: St Louis MO

Re: Seeking Data comparing long term passive vs. managed fun

Postby Brian2d » Fri Jan 25, 2013 10:46 pm

What convinced me was this: Find articles about whatever hot mutual fund is doing great from the past. Then compare that funds return to a comparable index fund from that point forward. Usually the index wins.
Brian2d
 
Posts: 150
Joined: Thu Jan 20, 2011 10:04 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby lindisfarne » Fri Jan 25, 2013 11:35 pm

The SPIVA persistence data for managed funds - just search for SPIVA on this forum & you'll find links to the data.
lindisfarne
 
Posts: 411
Joined: Sat Jan 19, 2013 2:55 am

Re: Seeking Data comparing long term passive vs. managed fun

Postby Jeff7 » Sat Jan 26, 2013 5:59 am

Other simple arguments, just centering around the costs:
- If you go shopping for something, you'd expect the more expensive options to offer something more in return, right? A $7 toaster is probably not going to be as good as a $30 one, and you'll probably also get a better warranty on the latter. On the other hand, if the maker of the $7 toaster got to that price point by really pushing for efficient, highly-automated manufacturing processes, whereas the $30 toaster maker is sitting back and doing things the way they did 60 years ago, and the quality ends up being identical, why spend more money when you don't have to?

- Expense ratios. Active Fund A: 1.4% -- vs -- Index Fund: 0.20%.
The active fund is 7x the cost of the index fund (excluding the compounded effects). You sure as heck won't get anything close to a written guarantee that the active fund will beat or even match the lower-cost index option. And I'm sure they also won't offer anything that it will underperform the market either. :D So: Over, under, equal - you get no guarantees of anything whatsoever, and you get to pay more money for the privilege. Yes, please sign me up for some of that!
(And of course, that gulf widens as you pour in more money and get the lower-cost options. Drop that down to 0.06%, and now you're paying 23.3x more for the active fund.)

- Trading costs: Active funds tend to churn through their stocks frequently. Those trading fees won't pay themselves.

- Time costs: Do your contributions once a year, or do automatic investments every week or two. Check in on it once, maybe twice, a year, and rebalance if your own written investment policy says you should. No need to spend time trying to figure out when to buy/sell/hold, or what to buy/sell/hold. Just put your money in, and let the market do what it does.


For things about performance....I remember something showing up where rainfall amount was in fact in the top 16 or top 10 ways of "predicting" what a stock or fund would do. It was really just random correlation, but it also showed how poor the popular evaluation methods are by comparison.
Or of course, the professional investment manager cat. Even if the cat would simply match the performance of the professional managers, he'd still work a heck of a lot cheaper - so here, again, costs matter. :)


Brian2d wrote:What convinced me was this: Find articles about whatever hot mutual fund is doing great from the past. Then compare that funds return to a comparable index fund from that point forward. Usually the index wins.

Here we go, LadyGeek pointed out in this thread, that the Wiki has been updated with something relevant here.
"Wow, that MSCI Emerging Markets sure shows up frequently in the top row."
Yeah, and look how often it's not in the top row.


I bet that the most difficult point to hammer home would be the Hitchhiker's Guide's helpful hint: "Don't panic!"
Don't panic-sell, don't panic-buy. You're very likely to cost yourself money in the process. The TV and financial sites are saying that this is the end of the stock market, and that no one will ever buy or sell stock ever again? Guess how many times they've said that before. ;)
Yes, when the market takes a dive, you'll shed some value. Briefly. In the meantime, you get to pick up some cheap stocks in your index fund. It has a habit of finding its footing again. Looking at a long-term market graph, the big recessions of the past typically amount to little more than temporary blips. If the lights in your house flicker once, that's not cause to panic and call emergency services.
Jeff7
 
Posts: 262
Joined: Sat Nov 24, 2012 3:30 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 10:22 am

Brian2d wrote:What convinced me was this: Find articles about whatever hot mutual fund is doing great from the past. Then compare that funds return to a comparable index fund from that point forward. Usually the index wins.


Yes, I've done that and it's a good suggestion, but what I'm looking for is someone who's really put it all together with good data, a few charts... something I can use to convince others and speak with authority.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 10:24 am

lindisfarne wrote:The SPIVA persistence data for managed funds - just search for SPIVA on this forum & you'll find links to the data.


I've found a couple threads using SPIVA. Thanks. I'll continue to look. But what I was really hoping for was some kind of study that puts it all together with a good apples-to-apples comparison that goes back decades covering several indices.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby Trev H » Sat Jan 26, 2013 10:26 am

Here you go - long term study passive vs managed funds.

1970 - 2012

Vanguards Wellesley Income fund (low cost active management) vs
30% Total Stock Market index / 5% Total International index / 60% Total Bond index (rebalanced yearly)

Similar stock/bond ratios.

Code: Select all
Year...Wellesley....10,000.00...30/5/60...10,000.00
===================================================
1970.....7.10.......10,710.00.....7.07....10,706.55
1971....15.03.......12,319.71....14.71....12,281.00
1972.....9.75.......13,520.89....10.38....13,555.22
1973....-3.49.......13,049.01....-4.18....12,988.68
1974....-6.43.......12,209.96....-4.98....12,341.26
1975....17.46.......14,341.81....18.56....14,631.86
1976....23.28.......17,680.59....15.53....16,903.52
1977.....4.27.......18,435.55.....1.38....17,136.88
1978.....3.62.......19,102.92.....5.10....18,010.09
1979.....6.20.......20,287.30....11.22....20,030.01
1980....11.88.......22,697.43....15.02....23,037.61
1981.....8.67.......24,665.29.....5.65....24,338.20
1982....23.30.......30,412.31....22.49....29,811.99
1983....18.60.......36,069.00....12.95....33,671.30
1984....16.64.......42,070.88....10.83....37,316.38
1985....27.41.......53,602.50....23.98....46,265.04
1986....18.34.......63,433.20....16.63....53,956.83
1987....-1.92.......62,215.29.....2.40....55,250.98
1988....13.61.......70,682.79....11.59....61,654.30
1989....20.93.......85,476.69....18.38....72,987.90
1990.....3.76.......88,690.62.....2.68....74,947.26
1991....21.57......107,821.18....21.23....90,857.81
1992.....8.67......117,169.28.....7.09....97,300.54
1993....14.65......134,334.58....11.42...108,412.75
1994....-4.44......128,370.12....-1.51...106,778.43
1995....28.91......165,481.93....22.99...131,327.85
1996.....9.42......181,070.33.....8.87...142,982.55
1997....20.19......217,628.42....15.39...164,993.99
1998....11.84......243,395.63....13.34...186,995.94
1999....-4.14......233,319.05.....8.15...202,226.76
2000....16.17......271,046.74.....3.45...209,207.63
2001.....7.39......291,077.10.....1.18...211,678.37
2002.....4.64......304,583.07....-1.67...208,136.99
2003.....9.66......334,005.80....14.00...237,281.37
2004.....7.57......359,290.04.....7.55...255,205.61
2005.....3.48......371,793.33.....4.13...265,751.98
2006....11.28......413,731.62.....8.76...289,033.18
2007.....5.61......436,941.96.....6.92...309,037.17
2008....-9.84......393,946.87...-10.03...278,026.84
2009....16.02......457,057.16....14.30...317,787.45
2010....10.65......505,733.75.....9.86...349,108.58
2011.....9.63......554,435.91.....4.47...364,727.70
2012....10.06......610,212.16.....8.41...395,417.72
===================================================
CAGR....10.03.....................8.93.............
StDev....8.98.....................7.72.............


Oh.. wait... that may not actually help you prove your point :-)

But it will show them that if they are going to use managed funds - they should consider low cost active management at Vanguard.

Best of luck wtih helping your friends see the light.

Trev H
Trev H
 
Posts: 1754
Joined: Fri Mar 02, 2007 11:47 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 10:30 am

Jeff7,

I appreciate your long post and agree with your comments. The cat link was neat.

However, while I'm new to bogleheads, I'm not new to investing in the vanguard style. It seems strange to me that someone hasn't just put together long term historical data to showing passive vs. active fund performance. I'd like to see it all laid out in a study or just a bunch of data.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby ResNullius » Sat Jan 26, 2013 11:00 am

I don't really care how other people invest, so I don't feel the need to prove that index funds do better over time that active management.
ResNullius
 
Posts: 2090
Joined: Wed Oct 24, 2007 4:22 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby kenschmidt » Sat Jan 26, 2013 1:10 pm

The only thing that matters is costs - expense ratio and turnover primarily. That is why a fund like Wellesley can have the long term success as Trev H demonstrated without breaking some cardinal mathematical rule or being some ridiculous statistical outlier. There's lots of articles that compare low cost index funds to high cost active funds and the index funds will always win over the long run. It's because high cost always loses to low cost. However, Vanguard investors do have the choice of low-cost active that should be competitive with the indexes.
User avatar
kenschmidt
 
Posts: 2192
Joined: Thu Mar 01, 2007 12:18 pm
Location: Cincinnati, OH

Re: Seeking Data comparing long term passive vs. managed fun

Postby LowER » Sat Jan 26, 2013 1:22 pm

Take them to FIRECalc and plug in some numbers then take a peek at future portfolio values assuming 0.18 ER compared to 1.4%. The difference is astounding!
Last edited by LowER on Sat Jan 26, 2013 1:52 pm, edited 1 time in total.
User avatar
LowER
 
Posts: 339
Joined: Sat Sep 29, 2012 1:43 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby pkcrafter » Sat Jan 26, 2013 1:40 pm

I'm a big believer in the whole Vanguard philosophy. I'm always trying to convince my friends and family to get into Vanguard as opposed to high-fee alternatives. I find it's hard to convince people about the benefits of investing in index funds verses managed funds.

It is hard to convince people about low costs, and almost impossible to convince anyone to index if they cannot see the benefits for themselves--no matter how much evidence you provide.

If you want to try, get a copy of Larry Swedroe's The Only Guide to a Winning Investment Strategy You'll Ever Need and see if you can get them to read it. :happy

Low costs is an easier sell. Start with this:

http://www.stanford.edu/~wfsharpe/art/active/active.htm

Here's some more:

A person who invests $50,000 in a 401(k) account with an average annual return of 8 percent and annual fees of 0.5 percent will retire after 30 years with $437,748, according Hewitt Associates, a human resources consulting firm based in Lincolnshire, Ill. If that person invested the same amount in a 401(k) plan that charged 1.5 percent a year, the amount saved would be just $330,718 -- a different of $107,030.
-----------------------------------------------
Seemingly small differences in the level of fund expenses have a profound impact on an investor's retirement income

Susan Woodward, former Chief Economist of the SEC.
----------------------------------
"The key to fund selection is to focus, not on future return--which the investor cannot control--but on risk, cost, and time--which the investor can control."
John Bogle
---------------------------------
"Asset allocation is critically important; but cost is critically important, too. -- All other factors pale into insignificance."
John Bogle
-----------------------------------
"Make no mistake about it, you are engaged in a brutal zero-sum contest with the financial industry.--every penny of commissions, fees, and transactional cost they extract is irretrievably lost to you."
William Bernstein
--------------------------------
But because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value. The investment business is a giant scam. It deletes billions of dollars every year in transaction costs and fees.

Harvard Management CEO Jack Meyer
-----------------------------------------------------------
For example, an investor who puts the maximum $14,000 a year in for 30 years into a plan with a 2 percent annual fee and gets 8 percent returns (before fees) will retire with $984,000 in his or her plan. The same amount of money over the same period of time in a plan with a 0.25 percent fee will grow to almost $1,394,000, a difference of $410,000, far more than the possible tax savings.
Brooke Masters, “Fees Take a Bit from 401(k)s, Washington Post 1/2005
---------------------------------------------------
All things being equal, you want the low-cost option," said Susan Ferris Wyderko, director of the SEC's office of investor education. "Costs matter -- a 1 percent yearly fee over 20 years can reduce your account balance 18 percent."
----------------------------------------------------
For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 – an 18% difference.
http://www.sec.gov
--------------------------
As a mutual fund investor, you'll never write a check to a mutual fund for its services. That means you'll never know exactly where your money is going unless you're very, very vigilant. Any service charges for mutual funds come right off the top of your investment or straight out of your returns. Because costs are deducted this way, many investors aren't even aware of how much they're paying for their mutual funds.

At Morningstar, we put a good deal of emphasis on mutual fund costs, not only because they're often hidden, but because we think favoring lower-cost funds is an easy way to improve your long-term results. We've found that over long time periods, lower-cost funds tend to outperform higher-cost funds. And costs are the only thing about a fund that are absolutely predictable, year in and year out.”

Morningstar Classroom, course 107, Fund Costs
http://www.Morningstar.com/classroom
----------------------------------------------
“Buried Costs. Many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to their clients.”
http://www.MotleyFool.com, Investing basics, Mutual Funds 4/10/05
-------------------------------------
Still, many financial advisers contend that taxes alone shouldn't determine investment choices. "Don't let the tax tail wag the investment dog" is an often-quoted cliche -- to which Duncan Richardson, chief equity investment officer at Eaton Vance Management in Boston, adds this caveat:

"It's not like the tax tail is this cute, little puppy dog tail," he said. "It's like an alligator's tail. Ignore it to your peril.

"Johnathan Burton, “How Fund Investors Can Pocket Higher After Tax Gains, MarketWatch, 4/11/05
-----------------------------
"If I told you there was a risk-free way to boost your retirement savings by 20 percent or more, would you be interested? In fact, what I'm suggesting is the soul of simplicity: Rein in your investment costs. By favoring low-cost funds over high-cost alternatives, you can dramatically increase your chances of having a secure retirement."

The upside of low expenses
A 401(k) of low-fee funds will grow faster.

NEST EGG AT AGE 65

Expenses Nest egg
High: 1.5% $663,600
Moderate: 1.0% $732,400
Low: 0.5% $809,700
Ultralow: 0.25% $851,800
Note: Assumes a 30-year-old earns $40,000 a year, gets 3% annual raises,
Sources: T. Rowe Price and MONEY research.
Walter Updegrave, Money Magazine, 12/17/04
---------------------------------------
A 401(k) of low-fee funds will have better odds of lasting.

ODDS OF SAVINGS RUNNING OUT

Expenses Odds
High: 1.5% 31%
Moderate: 1.0% 23%
Low: 0.5% 16%
Ultralow: 0.25% 13%
Note: Assumes 7% expected annual return before expenses, initial withdrawal of 4%, which is increased 3% annually for inflation.
Sources: T. Rowe Price and MONEY research.
Walter Updegrave, Money Magazine, 12/17/04
----------------------------------------------------
"All told, for the average taxable investor, taxes, fund expenses and sales commissions eat up 3% of equity funds' return."
The Great Fund Failure, N Weinberg & E Lambert, Forbes Magazine
------------------------------------
* That after costs the average investor manages to substantially underperform an index fund because if not strictly controlled costs can quickly mount up.

* That only a minority of investors can beat index funds after costs. Whether you think the market is efficient or not is beside the point, only a minority of investors can beat the market and if you achieve the same return as the market you will actually do better than the average investor.

* That many of the costs of active investing, like capital gains tax, active fund MERs and market impact costs, wipe out the excess returns earned by skilled active investing for most investors and it is very hard to avoid these costs while pursuing any kind of "active" investing strategy.
Travis Morien
--------------------------------
The real magic that gives indexing its inviolate edge, then, is more than broad diversification. It is rock-bottom expenses, enabling a minimal-cost index fund not merely to earn, but to deliver almost all of whatever returns it may earn. The net return, in short, approaches 100 percent of the gross return. In effect, Vanguard rebates to its owners the enormous profits that other investment managers sock away for themselves.
----------------------------------------------------
"In the 10 years through 2004, stock-fund investors paid out more than 20% of their return to taxes, after accounting for sales commissions, according to Lipper. Bond investors gave up nearly 40%."
Taylor Larimore
---------------------------------
~~"But Mark Carhart, now co-head of Goldman Sachs' quantitative research group, analyzed this issue in great detail as a finance professor at the University of Southern California. He found that, on average, a fund with 100% annual turnover gives up nearly 1% in transaction costs -- 0.95% to be precise. A fund with 25% turnover would give up only a quarter as much. A fund with 300% turnover -- three times as much. And so on.

We have also reviewed other studies that ascribe different transaction costs to different types of securities (and performed some research on our own). We found, for example, that the transaction cost for 100% of turnover is about 1.24% for larger-cap U.S. stock funds, and 0.43% for municipal bond funds."~~

Burrzey MF 13214
-----------------------------

Dont’s assume that because you pay more, you get more. Unlike just about any other business, it’s backward on Wall Street: the more you pay for services, the lower your returns are likely to be
Jerry Tweddell and Jack Pierce in Winning with Index Mutual Funds.
-------------------------------
Let me assure you, many financial services companies make every effort to obscure the total costs you are actually paying. Every extra dollar of expense you pay is skimmed from your investment capital. The only factor reliably linked to future mutual fund performance is the expense ratio charged by the fund.
Murton Malkiel, author of Random Walk Guide to Investing.
--------------------------------
Many of the costs of investing are practically invisible--you never have to write a check to anyone for fees or commissions.
Greg Baer & Gary Gensler, The Great Mutual Fund Trap
---------------------------------
You should care about expenses because they directly reduce the return you receive. It’s as simple as that.
John Brennan, Vanguard CEO
----------------------------------
Let’s face it: most investment companies are in the business to make money from you, not for you. Every dollar you save in commissions and fee expenses goes right to your bottom line.
Richard Ferri, Protecting your Wealth in Good Times and Bad.
---------------------------------
"You have to care about expenses. It is the most predictable characteristic of explaining future returns of funds. It's more reliable than past performance. It can't be said enough: with funds, costs matter. Annual expenses eat into total return, year after year. With high-cost funds, you pay more and pocket less.
Jim Peterson, vice president, Schwab Center for Investment Research
-----------------------------------
Are high fees worth it? You get what you pay for, right?
Wrong. Just about every study ever done has shown no correlation between high expense ratios and high returns.
Investopedia.com
---------------------------------
"The great irony of investing, then, is not only that you don't get what you pay for. The reality is quite the opposite: You get precisely what you don't pay for. So if you pay for nothing, you get everything."
John Bogle
---------------------------------
Does Cost Matter ?

Using the 500 Index Returns the past 40 years

10K Growth 1967-2006
646,137.56

If you deduct an ER of .09
625,252.57

If you deduct an ER of 0.18
605,025.87

Per M* the ER of Similarly Weighted Portfolio (which I expect may be some average ER for Large Blend Funds) = 1.26%

If you deduct an ER of 1.26%
406,862.71

Trev H
----------------------------------------
Table 1 – Effect of Fees on Investment Performance Over Time
TOTAL COST END OF HOLDING
INVESTOR INVESTMENT OF INVESTMENT 34 PERIOD TOTAL
1 Variable Annuity $267,985 $538,246
2 Class A Fund $168,240 $637,991
3 Class B Fund $178,142 $628,089
4 Class C Fund $245,584 $560,647
5 No-load Fund $ 31,644 $774,587

403bwise - Reasons For and Responses to the Lack of Direct Access
No-Load, Low-Expense 403(b) Plans in Many School
Editor’s Note – by Jason R. Doss
----------------------------------------
Fund costs, Rick Ferri

There are four items: the expense ratio which covers management and administration, plus trading costs including commissions and spread, plus the market impact of trading, less income from securities leading. In an ETF, traded costs are less because securities are trading in-kind with the authorized participants.

The expense ratio is in the prospectus. The trading costs can be estimated by the turnover rate of a portfolio and the commission cost per share, which are also listed in the expenses. Index funds have low turnover and low commissions, so the trading costs are only a couple of basis points (0.02% per year). The market impact of trading can be a factor when new securities are added to an index or deleted from and index. There have been many studies on this, and recent studies suggest the market impact has been going down for index funds over the years as managers become better at trading. Securities lending is typically not broken out in an annual report. Rather, it is listed as additional interest income.

In the end, you need to look at the known expenses, and then look at the tracking error of the fund to the index over several years. That will give you an idea of the total cost.
-----------------------------------------------------------------------
The only way I know with absolute certainty to increase the bottom line is to not pay as much in fees.
W. Riley CFP
------------------
"Hidden fees are a little bit like high blood pressure," says Jeff Acheson, director of retirement planning at Pittsburgh-based Schneider Downs & Co. "You don't really feel it, and you don't necessarily see it, but it'll eventually kill you."
--------------------------------------------------------------
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
pkcrafter
 
Posts: 7910
Joined: Sun Mar 04, 2007 1:19 pm
Location: CA

Re: Seeking Data comparing long term passive vs. managed fun

Postby john94549 » Sat Jan 26, 2013 2:05 pm

I suspect we could find some actively-managed funds, with high ERs and front-end loads, that out-perform some benchmark or another.

I also suspect what we found could as easily be explained by luck, as skill. If 5% (10%? 20%?) of all active managers "beat", after front-end loads and ERs are factored in, then I suspect we could identify (cherry-pick?) five (or ten, or twenty) funds out of 100 "which beat their Lipper averages for (fill in the blank)". .

Then there's the "apples/oranges" thingee. I have an actively-managed fund (UNSCX) which picks tech stuff, or stuff which might benefit from developments in tech stuff, or stuff which used to be . . .. You get the drift. The fund has done well, but compared to, exactly, what? At its inception (when my parents bought it for me, some 44+ years ago), it was called "United Science & Energy". I seem to recall the name change (and focus) occurred right around oil at giveaway prices.
john94549
 
Posts: 2450
Joined: Tue Jul 26, 2011 9:50 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 2:21 pm

ResNullius wrote:I don't really care how other people invest, so I don't feel the need to prove that index funds do better over time that active management.


Well, I guess I'm not sure why you felt a need to post at all, but to go off topic just a bit, I do think that when you have a citizenry that's ignorant of financial fees and good investment practices that it really does have huge negative effects on society which in turn really does effect you personally. Bad or manipulative financial practices effect government agencies and businesses as well as individuals, etc.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 2:29 pm

kenschmidt wrote:The only thing that matters is costs - expense ratio and turnover primarily. That is why a fund like Wellesley can have the long term success as Trev H demonstrated without breaking some cardinal mathematical rule or being some ridiculous statistical outlier. There's lots of articles that compare low cost index funds to high cost active funds and the index funds will always win over the long run. It's because high cost always loses to low cost. However, Vanguard investors do have the choice of low-cost active that should be competitive with the indexes.


Well, to play devils advocate, the whole concept of managed funds is that you can beat the market in such a way that exceeds the extra fees you incurred doing it. I think, by default, most people assume when you invest money that you are trying to find a person or a company that knows the market well enough to beat it. This is the perception I find I'm coming up against with people that's hard to overcome. Of course you are right that index funds are lower cost, but I disagree that that's the whole story. You have to confront people's perception that, on average, managed funds don't significantly beat market averages in the long term. That's not an intuitive conclusion.

Thanks for your post. Any names or link to those articles would be appreciated.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby pkcrafter » Sat Jan 26, 2013 2:38 pm

Bob, as I said, it's almost impossible to convert active investors to passive if they are managing themselves and somewhat knowledgeable. If they are totally uninformed and are using advisors, you may be able to get your point across, although it's unlikely they will consider doing it on their own.

I got into a discussion with active investors who took exception to my saying that there are only two reasons to use active funds, 1) no other choices in company plans, 2) you want to outperform indexing. These investors believed they did have other reasons. I found this article with a link to a study on active investors, which is interesting--

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
pkcrafter
 
Posts: 7910
Joined: Sun Mar 04, 2007 1:19 pm
Location: CA

Re: Seeking Data comparing long term passive vs. managed fun

Postby Stonebr » Sat Jan 26, 2013 2:47 pm

One key point that needs to be made is that you don't need to beat the market to meet your financial goals. This is true even if it is possible to find an actively managed mutual fund that will eke out an edge over the market index. You can meet your goals just by owning the market through an index fund. So why take the extra risk, do all that extra work reading all those stupid magazine articles, or pay those extra fees to an advisor-- all in the hope that you can beat an index that already provides you with what you want?

Active management is about ego gratification. Get your ego out of the picture and there's no reason to use active management, timing strategies, or individual stocks. Once you take that step you can cancel the subscriptions to Kiplinger, Money, Barron's, and the Ken Fisher newsletter, you can fire your smarty-pants advisor (and probably your tax people too), and then focus on other things in life that are more meaningful.
"have more than thou showest,
speak less than thou knowest" -- The Fool in King Lear
Stonebr
 
Posts: 946
Joined: Wed Jan 21, 2009 12:19 pm
Location: Maine

Re: Seeking Data comparing long term passive vs. managed fun

Postby mickeyd » Sat Jan 26, 2013 3:00 pm

But what I'm really looking for is a good resource that lays out the comparison. Does anyone know if there's been a study or just a good article that compares long term investments and shows the benefit of index funds over managed funds? It's been a while since I've read Bogles book. Maybe there's something in there. Of course I'd prefer a good link or pdf. Any suggestions?


I suggest that you slip your family and friends a copy of Bogleheads Guide to Investing and advise them to get back to you once that they have read it a time or two. If they really want to get an answer, they will read the book. If not, they won't.
Part-Owner of Texas

“The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
User avatar
mickeyd
 
Posts: 3564
Joined: Fri Feb 23, 2007 4:19 pm
Location: Deep in the Heart of South Texas

Re: Seeking Data comparing long term passive vs. managed fun

Postby john94549 » Sat Jan 26, 2013 3:06 pm

Paul, thanks for the link. One thing I noted which was not addressed is the "default" issue (you addressed it; the authors did not). Ever so many 401K plans offer actively-managed, high ER funds. In effect, without the option of low-cost index funds, the 401K participant "defaults" into active management or chooses to forego the 401K (and, perhaps, that tasty employer match). I would be interested to see, by dollar volume, the extent to which actively-managed funds are held "outside" 401K plans as opposed to within them. Then, going a bit further, when both actively-managed funds (with higher ERs) and passive funds (with lower ERs) are available in 401K plans, how does it break down?

This analysis might qualify (perhaps contradict) the authors' concept of "seeking alpha". Somehow, in my tummy, I wonder if it's just lousy 401K options in play.
john94549
 
Posts: 2450
Joined: Tue Jul 26, 2011 9:50 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby kenschmidt » Sat Jan 26, 2013 3:18 pm

bobsmith wrote:
kenschmidt wrote:The only thing that matters is costs - expense ratio and turnover primarily. That is why a fund like Wellesley can have the long term success as Trev H demonstrated without breaking some cardinal mathematical rule or being some ridiculous statistical outlier. There's lots of articles that compare low cost index funds to high cost active funds and the index funds will always win over the long run. It's because high cost always loses to low cost. However, Vanguard investors do have the choice of low-cost active that should be competitive with the indexes.


Well, to play devils advocate, the whole concept of managed funds is that you can beat the market in such a way that exceeds the extra fees you incurred doing it. I think, by default, most people assume when you invest money that you are trying to find a person or a company that knows the market well enough to beat it. This is the perception I find I'm coming up against with people that's hard to overcome. Of course you are right that index funds are lower cost, but I disagree that that's the whole story. You have to confront people's perception that, on average, managed funds don't significantly beat market averages in the long term. That's not an intuitive conclusion.

Thanks for your post. Any names or link to those articles would be appreciated.


I will agree with you that the average investor believes you can find a hotshot stock picker to beat the market. The flip side to that is that I believe there is an opposite effect on this board sometimes where it is assumed that all managers are bumbling idiots who detract from returns above and beyond the fact that they are just too expensive. Here are a couple of studies that I think do a good job of explaining returns:

Carhart 1997 - http://www.ntuzov.com/Nik_Site/Niks_fil ... t_1997.pdf
Fama-French 2008 - http://faculty.chicagobooth.edu/john.co ... rmance.pdf

These two studies indicate that there are actually a few bumbling idiots (and a few hotshots) but the relationship is weak and somewhat transitory. Most of the story points to costs and factor loadings as the determining factor in returns.

I understand the simple advice of picking index funds but personally believe if people understand the real reason why index funds do well (i.e., it's not the word index), they will be more likely to be in for the long term.

Welcome to the forum by the way!
User avatar
kenschmidt
 
Posts: 2192
Joined: Thu Mar 01, 2007 12:18 pm
Location: Cincinnati, OH

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 7:18 pm

pkcrafter,

Thanks for the huge outpouring of info and quotes. I would guess the vast majority of investors... 95% maybe... only invest through retirement plans at work or through local brokers. I don't think most people think far beyond whatever the "experts" recommend. I don't think most people really understand the kind or amount of fees they are paying. Nor do they realize the huge long term premium they are paying in exchange for few hours of work from a agent who helps them plan for retirement and gets them started. If someone is actively investing and handling their own affairs I assume they will eventually catch on, and if they don't then that's really on them, so no, that's not who I'm speaking of.

Again though, this is a long thread and still no one has found some kind of comprehensive study comparing active to passive funds? The cost calculations are relatively easy and obvious. Maybe part of the problem is that actively managed funds don't live too long if they have poor returns? Sort of like they just get repackaged and resold? Short of that, I imagine a poor fund would radically change it's allocation when it consistently does poorly. I wonder what are some of the oldest most respected managed funds? Seems there's always some new kid on the block.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Sat Jan 26, 2013 7:42 pm

kenschmidt wrote:I understand the simple advice of picking index funds but personally believe if people understand the real reason why index funds do well (i.e., it's not the word index), they will be more likely to be in for the long term.



I don't disagree, and I appreciate the point. But my perception is that the whole field of financial advisement is mostly a commission based system. They make their money over the long haul as do the fund companies they work for rather than what I think it should be. In the case of brokers, the more they move it around the more they make. A flat or hourly rate to get you set up for the long haul would seem to me to be the most fair and ethical way to offer people professional investment advice. But that's not how it works. Meanwhile, I'm just a guy trying to tell people the sky is falling. If I didn't know anything about investing, and I was trying to decide who to listen to, I'd be hard pressed to value the opinion of some-guy-who-does-his-own-investing over some guy who is a professional broker or financial adviser. The non-pro guy risks sounding like someone from Amway. That's the ice I feel I need to break.

Thanks for the welcome. What a great forum with so many helpful people. I'll be spending some time here for sure. I still am a little dumbfounded there hasn't been some kind of comprehensive study comparing active and passive funds. Seems like a no brainer. As I said elsewhere, I think the problem might be that managed funds, almost by nature, don't hold the same allocation year after year and that makes it hard to do a apple-to-apple comparison.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby mickeyd » Sun Jan 27, 2013 3:02 pm

I still am a little dumbfounded there hasn't been some kind of comprehensive study comparing active and passive funds.


There have been tons of studies and articles on the subject. Just Google it and you will have enough to read for the next month.

Here's the first link on Google's list
http://moneyover55.about.com/od/howtoin ... assive.htm
Part-Owner of Texas

“The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
User avatar
mickeyd
 
Posts: 3564
Joined: Fri Feb 23, 2007 4:19 pm
Location: Deep in the Heart of South Texas

Re: Seeking Data comparing long term passive vs. managed fun

Postby bobsmith » Mon Jan 28, 2013 12:37 am

mickeyd wrote:
I still am a little dumbfounded there hasn't been some kind of comprehensive study comparing active and passive funds.


There have been tons of studies and articles on the subject. Just Google it and you will have enough to read for the next month.

Here's the first link on Google's list
http://moneyover55.about.com/od/howtoin ... assive.htm


Thanks.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby learning_head » Mon Jan 28, 2013 10:15 am

bobsmith, your thread in part inspired me to start this one...
learning_head
 
Posts: 553
Joined: Sat Apr 10, 2010 7:02 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby Jeff7 » Sun Feb 03, 2013 5:07 pm

Barry Barnitz posted this link in another thread:
The Case for Indexing

Going through that quick, it looks like it's got some relevant information.
Jeff7
 
Posts: 262
Joined: Sat Nov 24, 2012 3:30 pm

Re: Seeking Data comparing long term passive vs. managed fun

Postby ThePrune » Mon Feb 04, 2013 9:42 pm

The 2 recent academic articles I like to share with people that deal quantitatively with the Passive versus Active management debate are:

Eugene Fama and Kenneth French, Luck versus Skill in the Cross Section of Mutual Fund Returns, Journal of Finance Vol. 65, No. 5 (2010) pp1915-1947.

L. Barras, O. Scaillet and R. Wermers, False Discoveries in Mutual Fund performance: Measuring Luck in Estimated Alphas, Journal of Finance Vol. 65, No. 1 (2010) pp 179-216.

Both research reports, covering a long-range (multi decade) time period, produced very similar results: after accounting for mutual fund fees, only a very tiny fraction of activiely managed mutual funds appear to have outperformed based on skill rather than luck. The Fama-French study estimated only about 3% outperformance based on skill. The Barras-Scaillet-Wermers study estimated only about 0.6% outperformance based on skill.

What's interesting to consider is the additional fees that you'll pay to an investment adviser to help you identify the best actively managed mutual funds to purchase. Tack on another 1% for this advice and it might well be impossible to outperform the passive market indices, based on skill alone, over long time periods.
Investment skill is often just luck in sheep's clothing.
User avatar
ThePrune
 
Posts: 774
Joined: Wed Nov 10, 2010 10:38 am
Location: Midland, MI

Re: Seeking Data comparing long term passive vs. managed fun

Postby zottopix » Mon Feb 04, 2013 10:04 pm

I'm surprised no one has mentioned this:
http://us.spindices.com/resource-center ... hip/spiva/
zottopix
 
Posts: 33
Joined: Tue Nov 22, 2011 12:37 am


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Browser, martiansteeler and 21 guests