Quandary of ML Stock Picker vs. VTSMX or VFINX

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FloridaCurmudgeon
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Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by FloridaCurmudgeon » Thu Mar 30, 2017 7:18 pm

Hi! I've stumbled onto your site when researching ML v. Vanguard. Already found good advice on using VTSMX vice VFINX for a good "fire and forget" style investment.

Right now, I'm going thru the quandary of keeping my ML stock picker and his 1% service charge who has averaged about 11.5% return from March 31, 2016 thru today. The S&P during this same period was a shade under 15%, VFINX a shade over 15% and VTSMX about 15.9%. I've read that performance from a stock picker will not be as good during up markets, but will protect the assets during a down market. However, the 6 month reading and 9 month reading during the above time period indicates the performance of my ML stock picker has been consistent.

• Do I need a longer sample time?
• Can I afford a longer sample time?
• Is it true that during bear markets index investors take heavy losses?

My personal situation is I am my first year into retirement, have a few penny's that will provide some comfort and reasonably healthy so looking at hopefully 15 to 20 years and possibly more.

Any Bogleheads out there with some KISS advice?

Thanks a million. :)

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by Jack FFR1846 » Thu Mar 30, 2017 7:54 pm

Are you sure those comparisons include dividends?

I ask because I brought up my Fidelity account and my total US stock premium/ total US bond premium account which your comparisons all should have beaten returned 17.46% for the last year and my roth with 100% total US stock returned 26.28%.

Oh, wait....there's a row for the S&P 500 and it was 24.98%

Others here always say to go to Morningstar for total return charts.
Bogle: Smart Beta is stupid

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in_reality
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by in_reality » Thu Mar 30, 2017 7:58 pm

Protect your assets via safe asset classes.

Good luck with picking stocks that won't fall in a crash.

A safe withdrawal rate in retirement is generally about 4%. 25% of that going to an advisor who most likely can't do as promised makes no sense to me.

The advisor gives a warm hello when they greet you right! From a human perspective it's nice to be appreciated! Is it worth it?
Last edited by in_reality on Thu Mar 30, 2017 8:44 pm, edited 2 times in total.

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grabiner
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by grabiner » Thu Mar 30, 2017 8:06 pm

Welcome to the forum!
FloridaCurmudgeon wrote:Right now, I'm going thru the quandary of keeping my ML stock picker and his 1% service charge who has averaged about 11.5% return from March 31, 2016 thru today. The S&P during this same period was a shade under 15%, VFINX a shade over 15% and VTSMX about 15.9%. I've read that performance from a stock picker will not be as good during up markets, but will protect the assets during a down market.
If this is correct for a particular strategy, it is correct for the wrong reason. It is common for a mutual fund to hold 95% of its investments in stocks, and 5% in cash (which it keeps available for future purchases, and to meet investor redemptions). Such a fund is likely to underperform the 100%-stock index in a rising market, and outperform, at least before expenses, in a falling market. But this is not an advantage; you can put 95% of your investments in a stock index fund and 5% in a bank account, and get the same 95% stock exposure.
However, the 6 month reading and 9 month reading during the above time period indicates the performance of my ML stock picker has been consistent.

• Do I need a longer sample time?
• Can I afford a longer sample time?
You would need a much longer time to identify a successful stock-picking strategy, even if there are investors with that ability. An investor who has no ability to pick good stocks, but is equally likely to outperform or underperform the market by 4% at random, has a 1/6 chance of beating the market by more than 1% over 16 years; this is why past performance is not a good indication of future results. Meanwhile, you are paying a guaranteed cost of 1%, versus 0.05% for Admiral shares of an index fund, and you may be paying more in taxes; this is why you can't afford to wait.

The key to the Bogleheads philosophy is low costs. This doesn't necessarily mean index funds, but it usually does, because index funds are available at very low cost.
• Is it true that during bear markets index investors take heavy losses?
Yes, but active investors lose just as much. In 2008, Vanguard Total Stock Market Admiral shares lost 36.99%, but the average large-cap blend fund tracked by Morningstar lost 37.79%; there were just as many stock-pickers who lost even more than the market as who lost less.
My personal situation is I am my first year into retirement, have a few penny's that will provide some comfort and reasonably healthy so looking at hopefully 15 to 20 years and possibly more.
In that case, you probably don't want all your money in stock, so you are correct to be concerned about risk. But as noted above, the best way to limit your risk is to limit the amount of money exposed to the risk.
Any Bogleheads out there with some KISS advice?
If it's all in an IRA, the simplest thing to do would be to put the whole thing into a Vanguard LifeStrategy or Target Retirement fund; this will give you a single portfolio which will have reasonable returns for whatever risk level you choose. If you have taxable investments, you'll probably want to hold multiple funds and take taxes into account, but you can still have a simple portfolio with just three funds.

To get better advice on the right numbers, please give your information as suggested in this post: Asking Portfolio Questions
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David Jay
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by David Jay » Thu Mar 30, 2017 8:31 pm

Welcome to the forum.

I would recommend the Boglehead Startup Kit for a start. I would carefully read the section on "asset allocation" to understand risk versus return.

Link here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Alto Astral
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by Alto Astral » Thu Mar 30, 2017 9:42 pm

FloridaCurmudgeon wrote:Right now, I'm going thru the quandary of keeping my ML stock picker and his 1% service charge who has averaged about 11.5% return from March 31, 2016 thru today.
Welcome! I am glad you stumbled here. You've just saved yourself 1% fee + a lot of heartache in a bear market.

I started off with "A random Walk Down Wall Street". Great book. Explains why no one can consistently outperform the markets with examples. Small book; lend it from library. If you'd rather just get advice here, pick VTSMX. All my taxable money goes there. I try to mimic it in my retirement amounts.

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Taylor Larimore
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Managed fund performance in bear markets

Post by Taylor Larimore » Thu Mar 30, 2017 9:56 pm

Is it true that during bear markets index investors take heavy losses?
FloridaCurmudgeon:

According to the article linked below, with figures from the respected Dow Jones/S&P SPIVA report, in all categories but one, managed funds underperformed their index benchmarks during each of the last two bear markets:

In my opinion, it is a myth by the financial industry that managed funds outperform in bear markets.

http://awealthofcommonsense.com/2015/03 ... r-markets/

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

2comma
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by 2comma » Thu Mar 30, 2017 10:48 pm

Some KISS advice. Forget about shorter (1 year) term returns, look at decades long returns. You cannot control the markets and it's very unlikely you'll find the lucky few funds that beat it for a while, even a long while. I remember when Peter Lynch and the Contra Fund was all the rage; it outperformed for years, just look at it know. You can however control costs and take what the market gives. A 1% fee is a high hurdle to cross and it ain't likely any fund can beat it's index for long and it ain't likely you will discover that fund at the right time let alone get out of it before it looses any magic (luck) it may of had.
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by bottlecap » Fri Mar 31, 2017 6:07 am

ML doesn't hire successful stock pickers. ML hires salesmen.

Figure out what you are doing by yourself and dump ML.

You don't need more time to test the "stock picker". Even if you found the best in the world, he won't be a salesman managing your account for long.

Index investors don't do worse in bear markets, that is something the sales industry made up. It would require the stock picker to successfully time the market and get out before the bear and back in before the bull. There is no evidence of this. Besides, if the stock picker knows when to get out, wouldn't it be logical he could get back in at the right time and beat the index in a bull market?

Moreover, even if it was true, indexes do better as a whole. Don't you want a better total return?

Welcome to the forum!

JT

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by GLState » Fri Mar 31, 2017 8:05 am

Here is a link to the 2008 Standard & Poors SPIVA report mentioned by Taylor...
http://www.spindices.com/documents/spiv ... d-2008.pdf

"The belief that bear markets favor active management is a myth. A
majority of active funds in eight of the nine domestic equity style
boxes were outperformed by indices in the negative markets of 2008.
The bear market of 2000 to 2002 showed similar outcomes."

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Taylor Larimore
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The Truth about indexing and bear markets

Post by Taylor Larimore » Fri Mar 31, 2017 8:26 am

GLState:

Thank you for the link.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by pkcrafter » Fri Mar 31, 2017 9:02 am

Welcome FloridaCurmudgeon,

The Bogleheads follow strategies created by John Bogle and we offer suggestions and recommendations to investors interested in our philosophy, so normally we ask new posters to provide some information to help us understand the poster's situation. If you would like to do that, here's the suggested format:

viewtopic.php?f=1&t=6212

If you would rather not get into this, then these are some of the issues you should be concerned about.-

You say your ML guy is a stock-picker. How many stocks? Are your stocks diversified?
Dividend-paying stocks?
How many stocks does he buy/sell each year?
Any mutual funds?
Individual bonds or bond funds?
The above questions are aimed at trying to determine what your actual annual fees really are. You've got an advisory fee plus buy/sell fees and maybe others as well.
What % of total invested assets are you withdrawing each year? 4% is considered about the limit for a sustainable withdrawal rate, and that includes fees and taxes.
What is you overall allocation to stocks vs non-stocks (bonds and cash)
How much in tax-advantaged accounts?

I'm asking because it's doubtful that your broker is required to provide fiduciary duty, which means he is not required to act in your best interest. Translate to $$ for ML.

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.

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Taylor Larimore
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by Taylor Larimore » Fri Mar 31, 2017 10:23 am

Paul:

Your post is very helpful to FloridaCurmudgeon and other new Bogleheads.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by ruralavalon » Fri Mar 31, 2017 11:02 am

Welcome to the forum :) .
FloridaCurmudgeon wrote:Hi! I've stumbled onto your site when researching ML v. Vanguard. Already found good advice on using VTSMX vice VFINX for a good "fire and forget" style investment.

Right now, I'm going thru the quandary of keeping my ML stock picker and his 1% service charge who has averaged about 11.5% return from March 31, 2016 thru today. The S&P during this same period was a shade under 15%, VFINX a shade over 15% and VTSMX about 15.9%. I've read that performance from a stock picker will not be as good during up markets, but will protect the assets during a down market. However, the 6 month reading and 9 month reading during the above time period indicates the performance of my ML stock picker has been consistent.

• Do I need a longer sample time?
• Can I afford a longer sample time?
• Is it true that during bear markets index investors take heavy losses?

My personal situation is I am my first year into retirement, have a few penny's that will provide some comfort and reasonably healthy so looking at hopefully 15 to 20 years and possibly more.

Any Bogleheads out there with some KISS advice?

Thanks a million. :)
Yes you need to look at the long-term.

It's a myth that active management or stock picking does better in bear markets. Please see the SPIVA scorecards already referred to. Index investing succeeds because of broad diversification, consistency in performance and low expenses.

What is your age? Do you have any debt? What is your marginal tax bracket, both federal and state? What is your tax filing status? What types of investment/retirement accounts do you have, where is each account currently located, and what investments/funds are you using in each account? What is your current asset allocation (stock bond mix; domestic/international mix)? That sort of detailed information is necessary if you want detailed suggestions.

You are just retired so you want an asset allocation that is fairly conservative. For simplicity you could consider some mixture of mutual funds like these:
Vanguard Total Stock Market Index Fund;
Vanguard Total International Stock Index Fund; and
Vanguard Total Bond Market Index Fund.

There are ETF share classes of each of those mutual funds.

Those funds give you very broad diversification (to decrease your risk) and very low expense ratios (to increase your net returns).

If you prefer Fidelity or Schwab, they have similar funds you could use.
Last edited by ruralavalon on Fri Mar 31, 2017 11:17 am, edited 1 time in total.
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BL
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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by BL » Fri Mar 31, 2017 11:16 am

I believe you could also transfer to Merrill Edge to forego the 1% (25% of 4% safe withdrawal in retirement) fixed cost, assuming you choose to follow a 3-fund portfolio or similar ones suggested on this site.
(I am only familiar with Vanguard.)

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by KeithZz » Fri Mar 31, 2017 11:19 am

First, you need ask yourself what is a bear market for you. Bear market does not mean a crash like 2008. It means a yearly down trend. And for sure, indexing will lose during bear market. All indexing can do in bear market is keep losing more and more money. Active manager can easily beat indexing with quality only stock picks. People voted with feet, no one cares indexing between 70s to 90s. The question you really need ask yourself is if you are optimistic for US stock future. If you believe US market has a future up trend, then go to indexing, if you believe US market has a down trend, then go to active managers.

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Re: Quandary of ML Stock Picker vs. VTSMX or VFINX

Post by Taylor Larimore » Fri Mar 31, 2017 1:58 pm

KeithZz wrote:First, you need ask yourself what is a bear market for you. Bear market does not mean a crash like 2008. It means a yearly down trend. And for sure, indexing will lose during bear market. All indexing can do in bear market is keep losing more and more money. Active manager can easily beat indexing with quality only stock picks. People voted with feet, no one cares indexing between 70s to 90s. The question you really need ask yourself is if you are optimistic for US stock future. If you believe US market has a future up trend, then go to indexing, if you believe US market has a down trend, then go to active managers.
KeithZz:

Please read the facts in the earlier Replies.

Best wishes,
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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