NYT: That Rush to Beat the Market

[DA]

THE desire to beat the stock market is as American as baseball, apple pie and Warren Buffett.

So why do many investors persist in paying for actively managed funds, when cheaper index funds are likely to deliver higher net returns over time?

Some might attribute this behavior to the so-called Lake Wobegon effect, after the town in Garrison Keillor’s radio series, “A Prairie Home Companion,” where “all the women are strong, all the men are good-looking and all the children are above average.” There is a well-documented human quirk to overestimate one’s strengths — and that of trusted advisers — in the desire to be better, smarter and richer than ordinary. The trouble is that for investors, paying more for above-average returns may undercut profits.

Commentary on indexing vs active management in today's New York Times

http://www.nytimes.com/2009/04/12/busin ... ef=mutfund

[bigH]

This highlights one of the failures of 401k: too many active funds. That is probably why 4.5 trillion in active is so high. I'll stick to my index.

[Adrian Nenu]

This highlights one of the failures of 401k: too many active funds. That is probably why 4.5 trillion in active is so high. I'll stick to my index.

The three main failures of the 401k:

- high fees.

- lousy investment options (few index funds).

- incompetent advisers

Instead of chasing returns, investors should be managing risk in order to avoid big losses. They got killed twice in one decade and they still don't get it.

Adrian
anenu@tampabay.rr.com

[chaz]

With index funds, you must be content knowing you aren't going to beat the market.

[stratton]

Index funds do beat the "market." You just have to redefine the "market."

If you define it as all investment returns by investors then anyone who does buy, hold and rebalance will "beat" the market. Even with 20/80 stocks/bonds because of everyone elses bad habits.

If you define it as the collective returns of all investors then anyone with the lowest fees "beats" the market.

If you define it as the Total Stock Market then a diversified asset allocation to cover global, style and size risks will give you a pretty good chance.

Paul

[chaz]

Index funds do beat the "market." You just have to redefine the "market."

If you define it as all investment returns by investors then anyone who does buy, hold and rebalance will "beat" the market. Even with 20/80 stocks/bonds because of everyone elses bad habits.

If you define it as the collective returns of all investors then anyone with the lowest fees "beats" the market.

If you define it as the Total Stock Market then a diversified asset allocation to cover global, style and size risks will give you a pretty good chance.

Paul

Paul, you are correct, of course, with the re-definition.

[unclemick]

THE desire to beat the stock market is as American as baseball, apple pie and Warren Buffett.

So why do many investors persist in paying for actively managed funds, when cheaper index funds are likely to deliver higher net returns over time?

Some might attribute this behavior to the so-called Lake Wobegon effect, after the town in Garrison Keillor’s radio series, “A Prairie Home Companion,” where “all the women are strong, all the men are good-looking and all the children are above average.” There is a well-documented human quirk to overestimate one’s strengths — and that of trusted advisers — in the desire to be better, smarter and richer than ordinary. The trouble is that for investors, paying more for above-average returns may undercut profits.

Commentary on indexing vs active management in today's New York Times

http://www.nytimes.com/2009/04/12/busin ... ef=mutfund

Hormones.

I rest my case.

heh heh heh - 8) I have it under control capped at 15% of portfolio.

Besides I can quit anytime. Maybe when I croak? .

[DA]

Maybe when I croak? .

Maybe when the Saints win the Super Bowl. You might croak first.

[unclemick]

Maybe when I croak? .

Maybe when the Saints win the Super Bowl. You might croak first.

heh heh heh - no comment. Hopefully my Target Retirement 2015 will be sufficient until??

[baw703916]

The three main failures of the 401k:

- high fees.

- lousy investment options (few index funds).

- incompetent advisers

Instead of chasing returns, investors should be managing risk in order to avoid big losses. They got killed twice in one decade and they still don't get it.

Adrian

But if your 401(k) options only include active funds with high fees, "getting it" still doesn't solve your problem.

Brad

[freedomfunds]

Yes, too bad the

500 INDEX FUND
SMALL CAP INDEX FUND
EUROPEAN INDEX FUND

have all been huge losers in the last decade.

No need to let facts get in the way of dogma.

[unclemick]

The three main failures of the 401k:

- high fees.

- lousy investment options (few index funds).

- incompetent advisers

Instead of chasing returns, investors should be managing risk in order to avoid big losses. They got killed twice in one decade and they still don't get it.

Adrian

But if your 401(k) options only only include active funds with high fees, "getting it" still doesn't solve your problem.

Brad

I suspect there is more space at the barricades for an additional Crusader or two. If Mr Bogle can carry the torch widely for index funds - perhaps a few individuals here and there within their own companies can't hurt.

heh heh heh - otherwise it's struggle with 'tax managed' fund time. Vanguard of course. 8)

[baw703916]

Yes, too bad the

500 INDEX FUND
SMALL CAP INDEX FUND
EUROPEAN INDEX FUND

have all been huge losers in the last decade.

No need to let facts get in the way of dogma.

You must not have looked at M*'s return analysis of the Vanguard Small Cap Index Fund (NAESX) before posting--it shows an annualized return of +2.42% over the last ten years.

Brad

[freedomfunds]

Yes, too bad the

500 INDEX FUND
SMALL CAP INDEX FUND
EUROPEAN INDEX FUND

have all been huge losers in the last decade.

No need to let facts get in the way of dogma.

You must not have looked at M*'s return analysis of the Vanguard Small Cap Index Fund (NAESX) before posting--it shows an annualized return of +2.42% over the last ten years.

Brad

No, I actually looked a bit more than you did.

http://quicktake.morningstar.com/FundNe ... mbol=NAESX

10 year total return was 74th percentile (I.E. lost to 74 percent of small cap funds). SP500 Index lost to 56 percent, Euro Index lost to 80 percent.

[Random Musings]

freedomfunds wrote:

10 year total return was 74th percentile (I.E. lost to 74 percent of small cap funds). SP500 Index lost to 56 percent, Euro Index lost to 80 percent.

So, I assume you are taking a normal sample of index/passive funds for the past 10 years - or are you cherry picking? Lets look at the "core" Vanguard funds that are typically recommended on this board - including some of the slice and dicers.

TSM - 39th percentile
SCV - 69th percentile
TISM - 28th percentile
International Explorer (not passive but available) - 32nd percentile
REIT Index Fund - 45th percentile

And on the bond side:

Total Bond Market Index - 13th percentile
Vanguard ST Treasuries - 13th percentile
Vanguard IT Treasuries - 1st percentile
Inflation protection fund (only 5 years) - 12th percentile

How about for 20 years, 30 years?

I think that you aren't looking deep enough. And that's not even looking at Mel's unloved midcaps!

RM

[spam]

The dow advanced 3.14% on Friday, and the equity portion of my IRA (which includes both active and index funds) increased 4.54%. Did I "beat the market" on this day?

Adrian, I would like to add to your major 401k failings list. The first would be lousy accounting and blurry statements, and the second would be lousy information about the investment options. I have a no-Ticker S&P 500 index fund which increased about 16% since the May low, while the S&P 500 index has increased over 25%. Ouch!

[JasonR]

...10 year total return was 74th percentile (I.E. lost to 74 percent of small cap funds). SP500 Index lost to 56 percent, Euro Index lost to 80 percent...

Blah, blah, blah. You can't compare an index fund with something else that might contain any mix of asset classes (and cash/bonds). Why waste your time with useless, apples-to-oranges comparisons?

[ken250]

It's not clear to me index funds are likely to deliver higher returns, especially when you throw in the risk/SD adjustment and the potential for low future earnings.

[Random Musings]

ken250 wrote:

It's not clear to me index funds are likely to deliver higher returns, especially when you throw in the risk/SD adjustment and the potential for low future earnings.

It's even less clear to me that active funds, in the aggregate, are likely to deliver higher returns, using the same criteria. Interesting that over the past 10 years, with bascially very little equity return, that the "actives" still generally underperformed while holding some cash. When a secular bull returns, that'll make their chore even more difficult. If I want to hold cash, I'll hold it, I don't want my funds to.

Hence, I'll stick with passive/index. And the more asset classes one uses, the less desirable active looks.

RM

[ken250]

RM,

You want active in flat or down markets so you can avoid "the rising tide floats all boats" behavior of index funds, except in flat or down markets the boats are foundering or sinking.

Anything can happen going forward, but right now I'm feeling earnings prospects are not good. I believe 1Q09 was the first quarter in a long time dividend cutters exceeded dividend growers in the S&P.

[Random Musings]

ken250 wrote:

You want active in flat or down markets so you can avoid "the rising tide floats all boats" behavior of index funds, except in flat or down markets the boats are foundering or sinking.

However, in the last 10 years (through 3/31) where the markets have been flat/down, passive/index equity funds have still, on average, outperformed the actives. There have been a few clunkers according to M* (like SCV) - but a well-diversified equity side which would use some small-value tilt would have still beat the actives.

The active argument always requires that you know which ones are going to outperform moving forward. IMO, the best chances are with the lower-cost active funds, but still no guarantees because one bad choice could upset the apple cart.

RM

[ken250]

We do know how to filter active funds...risk-adjusted performance, costs, and 'threats' to management.