Longshadow wrote:A quick update: I have been educating myself reading the suggested resources by the folks who responded (waiting for some other information to arrive from the library and from Amazon). I had a meeting with the advisor on investing my 401K through her and discussing my general concerns over actively managed investing versus passive index fund investing. She presented two hypothetical portfolios of managed vs Vanguard (mostly index funds)in a 10 year time frame from 2003 to the present.
I have a couple of questions at this point.
The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 years.Both portfolios avoided the extreme drops when the overall market dropped and over a 10 year period were slightly ahead of the S&P 500. The portfolio was set up 55% stocks, 40 % bonds, and 5% cash. I questioned the credibility of a backward looking portfolio but the advisor assured me that these were highly rated funds 10 years ago and would have been likely choices for an actual portfolio. What am I missing? What should I be asking?
I am finding that managing my own investments and finances is doable. But, I am just getting started. In talking to Vanguard, they indicated that an advisor could be cleared to have access to an account. They also indicated that the Vanguard funds could be purchased and held at the advisor's firm. The latter sound like I would lose some of the low cost advantages of the Vanguard funds. My advisor indicated that fee for services on a periodic basis is difficult when investments are at other companies...and her general range for that kind of advising still seemed high. Does anyone have any thought or advice to an interim or hybrid approach that still uses an advisor on a limited basis?
Thanks for any thought on my questions.
Your 401k broker is giving you the same runaround all these active types do: "I can pick winning active funds that make up for my fees". It ain't gonna happen except for simple blind luck. There is almost no persistence in the outperformance of active managers from one period to the next. Standard and Poor's tracks managers over independent 5 year periods and finds completely random outcomes: less than 25% of "top tier" active managers stay in the top quartile. As many fall all the way to the 4th quartile and more than 10% do so badly they disappear.
What your 401k broker does is replace poor performing funds with new strategies that have done better
to give the appearance that they always are investing in "4 and 5 star funds". Its the old shell game. It's just a merry-go-round of disappointing results that are swept up under the rug.
As for your active fund portfolio beating the S&P 500, well, US large growth stocks have been the worst asset class in the world going on 13 years now, so any reasonably diversified portfolio that included small cap, international, or even real estate (even with a 2% expense drag) probably did better in the last decade or so. Not to mention bond returns have been exceptional as interest rates have collapses, you have a recipe that is almost guaranteed not to repeat. Also, as for less risk, of course a portfolio only 60% or so in stocks will have less risk than the S&P 500 -- but you don't need high-cost active funds to accomplish that task.
The emotions are the hard part -- gotta keep those in check. But as far as the right portfolio approach, there is no doubt that passive should be the preference.