My annualized returns are WORSE than yours. Why?

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Mr Critical
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My annualized returns are WORSE than yours. Why?

Post by Mr Critical »

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!
Last edited by Mr Critical on Tue Jan 28, 2014 7:31 pm, edited 1 time in total.
Quinn
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Re: My annualized returns are better than yours. Why?

Post by Quinn »

Typical performance of Bogleheads includes a wide variety of risk tolerances and needs to take risk. The Stock:Bond ratio of the average Boglehead is probably close to 60:40. If your portfolio is very stock heavy, you should have higher annualized returns with the stock market doing well.

For reference, the S&P 500 has had annualized returns of 16% over the last 5 years.
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telemark
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Re: My annualized returns are better than yours. Why?

Post by telemark »

Risk and return are linked, and the past five years have been very good to riskier portfolios. How did your advisor's funds do in 2007 through 2009?
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Bogle101
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Re: My annualized returns are better than yours. Why?

Post by Bogle101 »

Post the funds you held over the time period you mentioned, and let some of the posters here cross check to see if your results did outperform a comparable indexed asset allocation. If you held riskier assets like small caps, REITS or emerging markets and then compared your results the S&P 500, that would be silly.

Also, if your advisor did handily beat a bucket of comparabale index funds...

Why is he managing your Roth IRA and not a hedge fund?
Last edited by Bogle101 on Mon Jan 27, 2014 5:34 pm, edited 2 times in total.
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Sidney
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Re: My annualized returns are better than yours. Why?

Post by Sidney »

My ROTH IRA is less than 10% of my holdings.
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kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

Let's see the funds.
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Re: My annualized returns are better than yours. Why?

Post by KyleAAA »

Your performance is quite a bit lower than mine, actually. You can't glean investment success by looking at poll results on an internet form. Index investing is proven to be a superior strategy. That your portfolio may or may not have out-performed the average index portfolio does nothing to change that.

I would be VERY surprised if your overall performance actually out-performed a comparable portfolio of index funds. You're probably just counting wrong. If you posted your exact portfolio here we could probably prove that it didn't relatively easily.
livesoft
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Re: My annualized returns are better than yours. Why?

Post by livesoft »

Last year index funds returned over 30% and you only got 24%. What went wrong with your advisor?
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Re: My annualized returns are better than yours. Why?

Post by jimb_fromATL »

Mr Critical wrote:Cocky title, but I come with a posture of learning.

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!
Your manager would have had to work pretty hard to do poorly during the recovery from the crash of 2008.

In fact, it looks like he did -- do poorly that is. He didn't even match the S&P 500. If you had just bought a S&P index find like VFINX you could have earned an average of 32.18% for the last year; 16% for the last 3 years; and 17.81% over the last 5 years and not manage it at all.

Vanguard's Wellington balanced fund did:
1-Year: 19.66%
3-Year: 11.84%
5-Year:13.65%

jimb
Code Commit
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Re: My annualized returns are better than yours. Why?

Post by Code Commit »

Mr Critical wrote:What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?
Before posting the "cocky title", did you even check if your claim (underlined above) was accurate. Of course, you have not posted your actual funds or your asset allocation. So, we can't compare against a proper benchmark. But, the Vanguard Total Stock Market Index fund earned 19.97% annualized over the past 5 years, with 33.35% last year. The fund simply charged 17 basis points for investor class and 5 basis points for ETF/Admiral class.

So now the question is, did your advisor really earn his fees?
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Re: My annualized returns are better than yours. Why?

Post by Grt2bOutdoors »

It's not what you earn, it's what you keep. Think about it!

My second response is - are you so sure? Are your returns dollar weighted or time weighed? If someone is making continous investments during the year then surely they aren't benefitting from market returns during the periods their money was not in the market. Was all of your money invested on January 1st of last year? Why don't you disclose your investment portfolio and timing of investment inflows and outflows?
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baw703916
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Re: My annualized returns are better than yours. Why?

Post by baw703916 »

The advisor only underperformed the S&P 500 by about 8%. In the short run, a lot has to do with picking the right asset class for that particular year.
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Caduceus
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Re: My annualized returns are better than yours. Why?

Post by Caduceus »

Over long periods of time, there will be some money managers who do beat their relevant benchmarks even after costs, but they will be in the minority. How did you choose this manager? Why do you think he will continue to out-perform? Are you willing to bet your financial future on his outperformance? You may end up being lucky, but this seems like a loser's game.
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White Coat Investor
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Re: My annualized returns are better than yours. Why?

Post by White Coat Investor »

Mr Critical wrote:Cocky title, but I come with a posture of learning.

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!
Presuming you actually know how to calculate a return (if you're not sure check this out: http://whitecoatinvestor.com/how-to-cal ... -function/) 12% over the last 5 years isn't particularly impressive. A rising tide lifts all boats.

Look at all the Vanguard funds with a 12% return for the last 5 years:

Junk bonds: 15%
Target REtirement funds: 11-16%
Life Strategy moderate 12%
Life strategy growth 15%
Balanced index 13%
Convertibles 16%
STAR 14%
Wellington 14%

I haven't even gotten to the stock funds yet.

500 Index 18%
Windsor 20%
Mid caps index 22%
Small caps index 23%
Emerging markets 14%

I could go on Energy, Health Care REITs.

In fact, it looks like you could have invested in just about anything reasonable and beat 12% a year for the last 5 years. Now if your advisor had you in microcaps for the last 5 years (BRSIX 24%) I'd be impressed. But 12%? I would have fired him years ago for performance like that in our best bull market since the 90s.

Good luck with your decision.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Watty
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Re: My annualized returns are better than yours. Why?

Post by Watty »

You likley have bonds in your fund so might want to compare your performance to one of the targeted retirment funds.

The 2030 fund got 14.53% over the last five years.

https://personal.vanguard.com/us/funds/ ... =INT#tab=1
2b2
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Re: My annualized returns are better than yours. Why?

Post by 2b2 »

Mr Critical,

Posting your return of 12% means absolutely nothing without telling us how you were invested.
If you were 100% equities, you got robbed.
If you were 100% fixed income, you did extraordinarily well.

I am 100% in Vanguard index funds.
My XIRR over the past 5 years was 12.4%...so.. I guess I beat you, right?

2b2
sscritic
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Re: My annualized returns are better than yours. Why?

Post by sscritic »

I think some people left their sarcasm detectors at home this morning. The OP is clearly pulling our leg.
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midareff
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Re: My annualized returns are better than yours. Why?

Post by midareff »

My statistics tell me the SP500, if you had purchased it yourself, would have provided you with an annualized return of 15.43% Your advisor is under performing the SP Index by 3.53% yearly, and underperformed it by over 8% last year +++++ however much you paid him to provide this short fall for you.
robertalpert
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Re: My annualized returns are better than yours. Why?

Post by robertalpert »

Mr Critical wrote:Cocky title, but I come with a posture of learning.

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!


Which polls are your referring to?

What were the asset allocations associated with the boglehead poll'd performance?
sls239
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Re: My annualized returns are better than yours. Why?

Post by sls239 »

What if I have an advisor who actually earns his fees?
Well you wouldn't actually know that for another 30 years or so or for however long you would need him to outperform the market. Even a blind squirrel finds a nut sometimes, especially when nuts are plentiful.
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Mr Critical
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Re: My annualized returns are better than yours. Why?

Post by Mr Critical »

kerplunk wrote:Let's see the funds.
Thank you all. As requested, my AA is as follows:

AEGBX - EUROPACIFIC GROWTH FD 2.583%
AEPGX - EUROPACIFIC GROWTH FD 19.439%
AGRBX - GROWTH FUND AMERICA 4.013%
AGTHX - GROWTH FUND AMERICA 23.805%
AICBX - INVESTMENT CO AMERICA 0.108%
AIVSX - INVESTMENT CO AMERICA 25.761%
CWGBX - CAPITAL WORLD GROWTH 3.727%
CWGIX - CAPITAL WORLD GROWTH 20.564%

When I talked to my advisor about my distaste for expense ratios, and how appealing low cost index funds look...he said "you can do that if you're ok with average returns."

What are your recommendations/rebuttals for the "average returns" comment?
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Mr Critical
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Re: My annualized returns are better than yours. Why?

Post by Mr Critical »

robertalpert wrote:
Mr Critical wrote:Cocky title, but I come with a posture of learning.

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!


Which polls are your referring to?

What were the asset allocations associated with the boglehead poll'd performance?
Poll for last year is here: http://www.bogleheads.org/forum/viewtop ... 0&t=129567 My return was 24%.
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

January 2, 2013 to December 31, 2013 (using the percentages that Mr Critical posted above--translated into a $100,000 portfolio)

Your total return for 2013 was: 19.52% + 0.06% ($63.00 in dividends) = 19.58%

Image
Last edited by kerplunk on Tue Jan 28, 2014 11:35 am, edited 8 times in total.
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

Here is your asset allocation:

93% large-cap stocks, with a hefty "growth" tilt.

Image
Last edited by kerplunk on Tue Jan 28, 2014 12:25 am, edited 2 times in total.
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

January 2, 2013 to December 31, 2013 using only Vanguard Total Stock Market (VTI) and Vanguard Total International Stock (VXUS).

I used two-thirds VTI and one-third VXUS to keep things simple.

Your total return for 2013 was: 21.64% + 1.69% ($1,694.34 in dividends) = 23.33%

Image
Last edited by kerplunk on Tue Jan 28, 2014 1:10 am, edited 4 times in total.
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

Here is the two-fund asset allocation:

Image
Last edited by kerplunk on Tue Jan 28, 2014 1:05 am, edited 1 time in total.
robertalpert
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Re: My annualized returns are better than yours. Why?

Post by robertalpert »

Your funds appear to be all stock funds; your allocation appears to be 100% equity.

Performance is net of expense ratio but is not net of sales loads or 12b-1 fees. So you should subtract 6% from your portfolio performance to arrive at an adjusted performance on each and every fund.

So with 100% equity, your portfolio has apparently grown at a rate of 24%-6%=18%, underperforming the s&P by about 14%.
On the other hand, if your stock / bond allocation were 60/40, then this performance would be about right.


Edit: You have the growth of a 60/40 allocation with the risk of a 100% stock allocation. I think your advisor owes you an explanation. Or perhaps you could just become your own advisor.
Last edited by robertalpert on Tue Jan 28, 2014 12:47 am, edited 1 time in total.
patrick
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Re: My annualized returns are better than yours. Why?

Post by patrick »

kerplunk wrote:January 2, 2013 to December 31, 2013 (using the percentages that Mr Critical posted above--translated into a $100,000 portfolio)

Your total return for 2013 was: 18.9% + 0.06% ($63.00 in dividends) = 18.96%

Image
I think this one is wrong at least for AEGBX -- it ought to be about the same as AEPGX. Regardless, it won't change the overall result much due to it being a small fraction of the portfolio.
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Re: My annualized returns are better than yours. Why?

Post by Christine_NM »

Mr Critical -

Don't feel bad. Many of us were stuck with shameless, rob-you-blind brokers before we found index funds and Vanguard managed funds.

Hey, my Roth is all in Vanguard Healthcare and it returned 48% last year. But overall, my return was 11%, right on target for my asset allocation.
18% cash 44% stock 38% bond. Retired, w/d rate 2.5%
sambb
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Re: My annualized returns are better than yours. Why?

Post by sambb »

OP - your advisor is doing worse than average. And he is using the emotional words of "average" to hide the poor performance. You should be running away fast.
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Re: My annualized returns are better than yours. Why?

Post by TheEternalVortex »

Hmm, the stock portion of my 100% indexed portfolio returned ~20% annualized over the past 5 years.
plats
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Re: My annualized returns are better than yours. Why?

Post by plats »

sscritic wrote:I think some people left their sarcasm detectors at home this morning. The OP is clearly pulling our leg.
Bump. In case some missed it.
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Re: My annualized returns are better than yours. Why?

Post by pkcrafter »

Mr. C, are you paying the full loads on these funds? Are you aware that loads are taken even before the money is invested and they are not taken into account when the returns are posted?

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Longtimelurker
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Re: My annualized returns are better than yours. Why?

Post by Longtimelurker »

1: your returns are not better than mine
2: I beat your returns while having 25% of my assets in bonds, therefor my risk adjusted returns trounced yours
3: Your advisor is right, index investors get average returns. What he failed to tell you is that average returns will outperform 95%-98% of "others" over a 20 year period net of fees. So average returns produces far above average results.

If you want to continue to underperform "average" and help your advisor meet his financial goals, be my guest. :beer

PS: you paid loads? Are you nuts?!
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
barnaclebob
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Re: My annualized returns are better than yours. Why?

Post by barnaclebob »

When an adviser says things like "index funds are great if you like average returns" they are just stroking your ego because who wants to be average right? Try telling him that his fees would be great if he could guarantee to outperform.

5.75% loads are a nearly insurmountable ripoff and you probably didn't include them in your overall returns. They are also the perfect emotional trap because now if you sell your funds you will feel like you have wasted money and nobody wants to feel that way.

BTW I used to own AGTHX and it has been a closet index fund that pretty much matches the S&P 500 for a long time.
Last edited by barnaclebob on Tue Jan 28, 2014 10:42 am, edited 1 time in total.
Stan Dup
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Re: My annualized returns are better than yours. Why?

Post by Stan Dup »

"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author)
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
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Re: My annualized returns are better than yours. Why?

Post by JW-Retired »

Mr Critical wrote: Thank you all. As requested, my AA is as follows:

AEGBX - EUROPACIFIC GROWTH FD 2.583%
AEPGX - EUROPACIFIC GROWTH FD 19.439%
AGRBX - GROWTH FUND AMERICA 4.013%
AGTHX - GROWTH FUND AMERICA 23.805%
AICBX - INVESTMENT CO AMERICA 0.108%
AIVSX - INVESTMENT CO AMERICA 25.761%
CWGBX - CAPITAL WORLD GROWTH 3.727%
CWGIX - CAPITAL WORLD GROWTH 20.564%
When I talked to my advisor about my distaste for expense ratios, and how appealing low cost index funds look...he said "you can do that if you're ok with average returns."

What are your recommendations/rebuttals for the "average returns" comment?
His comment is a standard line we have all heard many times. Average consistently is a lot better than average - high expenses, which is surely what you are getting. Notice he slickly doesn't actually say he is doing better than indexes.

I'm not totally sure you are serious but I took the trouble to look up all your funds anyway. These are all very ordinary large (like $100B in assets) American funds with high expenses and big sales commissions. That income stream from you to him is all your advisor cares about. Three of them had 5.75% front loads with a 0.75% ER with a 0.24% 12b1 annual sales fee. The other 5 had more like a 1.5% ER with a 1% 12b1 annual sales fee and a 5% deferred sales load. Standard high expenses managed funds stuff.

These funds are all so huge in aggregate it is quite likely they are returning something close to the appropriate indexes minus your high expenses. You could probably see that by plotting the growth of $10k of these funds in Morningstar and comparing to a similar Vanguard fund. Don't forget to knock the 5.75% load off the top for your load funds since Morningstar will not include that. The ER is included and the 12b-1 fees are included in the ER.
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Re: My annualized returns are better than yours. Why?

Post by BolderBoy »

Longtimelurker wrote:PS: you paid loads? Are you nuts?!
+1. ROFL.
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Re: My annualized returns are better than yours. Why?

Post by gvsucavie03 »

OP - you've really got to do some reading to see the whole picture on how badly you are 1) underperforming, and 2) are being massively ripped off. Go to the Wiki today and read everything, then read "Bogleheads Guide to Investing" and perhaps "Little Book of Common Sense Investing." You will see over and over again why a passively-managed (I'll add, a "DIY" managed) portfolio of low-cost index funds provides the most diversification, lowest risk, lowest cost, AND best performance AFTER loads and fees. The myth you claim in your highly arrogant title has been spread for over a century and, honestly, on this forum is laughable because we know the truth. Your advisor knows nothing more than throwing the proverbial dart at the Wall Street Journal and is making a killing off of good folks like yourself who are sucked into the belief that outperforming the market is possible AFTER expenses and without any added risk.

Your advisor is making decisions in his/her own self interest and not your own. As stated over and over on this forum, that is definitely "hazardous to your wealth"..... time to fire!
robertalpert
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Re: My annualized returns are better than yours. Why?

Post by robertalpert »

sscritic wrote:I think some people left their sarcasm detectors at home this morning. The OP is clearly pulling our leg.

My leg does feel a little out of joint this morning.
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Re: My annualized returns are better than yours. Why?

Post by 1210sda »

Mr Critical wrote: When I talked to my advisor about my distaste for expense ratios, and how appealing low cost index funds look...he said "you can do that if you're ok with average returns."
[/quote]

Shooting "Par" at Augusta National is OK if you want an average round :D

1210
Stan Dup
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Re: My annualized returns are better than yours. Why?

Post by Stan Dup »

Until the OP responds with meaningful feedback, I think he should be considered a troll.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
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Re: My annualized returns are better than yours. Why?

Post by gvsucavie03 »

Stan Dup wrote:Until the OP responds with meaningful feedback, I think he should be considered a troll.
Since the OP came back with real info, I think we have a serious, uninformed investor that's challenging some long-held beliefs that supreme performance is actually achievable. So sad....
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

patrick wrote:I think this one is wrong at least for AEGBX -- it ought to be about the same as AEPGX. Regardless, it won't change the overall result much due to it being a small fraction of the portfolio.
Thank you, I had the incorrect "buy" price for this fund. It should be fixed now.
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Imperabo
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Re: My annualized returns are better than yours. Why?

Post by Imperabo »

OP doesn't seem at all trollish to me. Seemed like an honest and common perspective.
kerplunk
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Re: My annualized returns are better than yours. Why?

Post by kerplunk »

Imperabo wrote:OP doesn't seem at all trollish to me. Seemed like an honest and common perspective.
I agree. Especially since he replied with very specific fund names and allocations.
goblue100
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Re: My annualized returns are better than yours. Why?

Post by goblue100 »

Mr Critical wrote:When I talked to my advisor about my distaste for expense ratios, and how appealing low cost index funds look...he said "you can do that if you're ok with average returns."

What are your recommendations/rebuttals for the "average returns" comment?
This says it better than I can:
http://www.cbsnews.com/news/do-you-want ... t-average/

The following is the typical Wall Street response to an investor who asks about indexing as a strategy: "If you index, you will get average rates of return. You don't want to be average, do you? Don't you think you can do better than that? We can help you achieve that objective." The response is an appeal to the all-too-human need to be better than average. They ridicule and oppose indexing because it's the loser's game for them.

The mistake Wall Street wants and needs you to make is to fail to understand that by simply earning market returns, you'll earn greater returns than the average investor. The reason is that the average actively managed fund underperforms its benchmark by about 1.5 percent per year on a pretax basis (and by far more on an after-tax basis). In other words, by earning market returns you will outperform the average investor, and that includes professional investors. That's simple mathematics, as described by Nobel Laureate William Sharpe in his paper The Arithmetic of Active Management: "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement." The bottom line is that the only sure way to be above average is not to play Wall Street's game of active investing.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns
goblue100
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Re: My annualized returns are better than yours. Why?

Post by goblue100 »

kerplunk wrote:Here is your asset allocation:

93% large-cap stocks, with a hefty "growth" tilt.

Image
Assuming this is correct, you under performed my daughters Vanguard Retirement 2060 fund which returned 24.4% last year, and is a 90 / 10 equity / bond fund. So you took more risk with less return.

If we look at the Vanguard 2050 Retirement fund, it is also 90 /10 and has returned 15.67 over the last 5 years, and I believe you said you had a 12% return over the last 5 years. Ask your advisor why he is underperforming "average"?
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns
inbox788
Posts: 7733
Joined: Thu Mar 15, 2012 5:24 pm

Re: My annualized returns are better than yours. Why?

Post by inbox788 »

Mr Critical wrote:Cocky title, but I come with a posture of learning.

I have our Roth IRA's with an advisor who "actively manages the funds." I'm new to the site, but decided to compare my performance vs. typical performance for Bogleheads (according to the polls). For the last five years (as long as I've been investing), I've had an annualized return of 12%. Last year, returns were 24%. This is after all fees and expenses. What's the problem with paying more in fees/expenses if the overall return % outperforms index funds? What if I have an advisor who actually earns his fees?

What am I missing? Where are my blind spots? Thanks in advance!
1) Are you adequate comparing risk adjusted return? Are you comparing to SP500 index? Balanced 50/50 stock/bond portfolio? Use former for up years, latter for down years and see if you can really beat that in the long run.
2) Are you including fees? Often raw returns don't subtract out the expense fees.
3) Are you including dividends? Income or index funds contain a few percentage in dividends a year that add up over time. Growth funds generally have less. If you don't include dividends, the growth funds look better than the income funds.
4) Are you including loads? I looked at a couple of your funds and they may have loads in the 5 or 6 point range, though it's not clear if it's front end, back end, or if any is reduced if held longer term.
ProfessorX
Posts: 518
Joined: Mon Jul 04, 2011 12:29 pm

Re: My annualized returns are better than yours. Why?

Post by ProfessorX »

It sounds like the OP got robbed and was deluded about it. He or she is whistling down the street smiling about a very high risk portfolio with substantially lower than average returns for the level of risk taken.

OP please read the Boglehead wiki and save yourself some money.
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