Newsletter vs. Indexing

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Newsletter vs. Indexing

Post by Jerzy » Thu Oct 05, 2017 8:59 am


This is the first time I’ve posted on here but the information provided on this forum has been invaluable. Anyways, I started saving for retirement 2-3 years ago after my father-in-law gave me a bunch of great advice and helped me get started. He taught me the ins and outs of a Roth IRA and gave me some ideas for investing (“just start putting money into an s&p index initially”). Then he started recommending mutual fund picks from a newsletter he follows. The picks would normally be sector picks(healthcare, conslumer stabples, etc), some international, and small caps.

Maybe a year into doing it this way, and getting close to 20 funds in my portfolio based on the newlestters picks, I started reading the bogleheads book and followed that with Rick Ferris asset allocation book. Then I was torn, because I hated changing direction from what he had told me. He’s incredibly intelligent and I’m sure he’s done his research. But, I also think the indexing method and asset allocation makes so much sense and is a lot easier to maintain. It also appears, from what I’ve read, to rarely underperform any active portfolio by much and after expenses usually beats most complicated and actively managed portfolios.

My wife and I are trying to figure out the best way to invest a large amount of money for her retirement, and my FIL is recommending the fund picks from his newsletter. He says that the newsletters model portfolios have outperformed the s&p by 50%. The author of the newsletter periodically changes funds in his portfolio so it’s hard to backtest accurately(maybe there’s a good way to do this that I just don’t know?). I can’t imagine the newsletters portfolio did 50% better than the s&p over the last five years or so. When I put the current model portfolio into the portfolio visulizer and compare it to vtsmx, they basically have the same returns. The newlestters portfolio occasionally does a little better but after you take away the .7% expense ratios for the funds it’s right back down with or below the total market. Is it possible the newsletter could have beaten the market by 50% over the last 5 years? Is there a trick the newsletter could be doing to make it’s returns actually look better or anything amlomg those lines?

My FIL is very nice and not aggressive about choosing his way, I would just like to be able to give him a reason that I think doing an index makes more sense than the newsletter picks. I think he thinks indexing is leaving money on the table when if you just choose the newletter picks you’ll be so much further ahead.

I hope I made every clear, if you need anymore info please let me know.


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Re: Newsletter vs. Indexing

Post by mhalley » Thu Oct 05, 2017 10:48 am

Certainly it is possible that the newsletter outperformed for the last five years. The question is, will it repeat this for the next 5,10,30 years? There will always be certain funds that outperform. But there is usually reversion to the mean eventually. should intelligent investors who select mutual funds undertake the task of choosing them? Let me start with my own skeptical assessment of how not to go about it: letting selections be based principally, or even importantly, on the records of fund past performance that are published and promoted by the hyperbolic marketing machine that drives the mutual fund industry today. "Don't go there!" The overpowering lesson of history—as I shall try to persuade you today—is that in the long run, a diversified equity portfolio is a commodity.
Jack Bogle
Remember the Hubert Financial Digest? This is a great article about it.
...the good news is that we now know we really don't need HFD to keep teaching us the same lesson: Leave the newsletters behind and hitch your wagon to index funds, pardner ... 2016-06-08
Last edited by mhalley on Thu Oct 05, 2017 11:03 am, edited 3 times in total.

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Re: Newsletter vs. Indexing

Post by livesoft » Thu Oct 05, 2017 10:53 am

Have you actually determined the performance of your existing Roth IRA? People can say anything they want to about performance, but I think you should want to deal with facts. What is the actual performance of your Roth that has been invested according to your FIL's suggestions?

And in order to calculate the true, actual, factual performance you have to learn how to use the XIRR() function in Excel or the equivalent. No fake performance number calculations are allowed. This means recording your actual buys and sells. I don't think portfolio visualizer is doing all that for you.
This signature message sponsored by sscritic: Learn to fish.

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Re: Newsletter vs. Indexing

Post by Katietsu » Thu Oct 05, 2017 10:58 am

I would not try to change his mind. One option is to ask him to permit you to read the newsletter. You willl then have more information from which to come to your own conclusion. The current situation is rather dangerous where you are blindly following recommendations without understanding why. The second option is to be polite but to just go ahead and invest as you wish with index funds. Or do option 1 then do option 2.

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Re: Newsletter vs. Indexing

Post by midareff » Thu Oct 05, 2017 11:08 am

I think there is merit to both approaches although about 80% of my portfolio is in straight Vanguard index funds for equities and bonds. S&P, Total US, Total International, etc. I also have a slice of Vanguard's Healthcare and had a slice of REITs until recently. OTOH, I pick sector funds and such in my Roth at Fidelity. I have held Healthcare there, Emerging Markets, EM Bonds, Extended Indexes and such and presently hold Tech there. While I'm up large there this year, and it's just 6% of total, I have come to two conclusions about using my Roth this way. #1, while it's great to be smart it's even better to be lucky, and #2. I think moving forward I'm just going to hold the 2 highest rated sectors there from Fidelity's Quarterly Sector Report and change when their recommendation does. Eventually I'll probably go half and half Total US and Total International there, but not yet. Having 20 funds with 20 fees strikes me as an easy way to achieve mediocrity. ... like losing your hedge fund bet by 22%.

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Re: Newsletter vs. Indexing

Post by Jerzy » Fri Oct 06, 2017 9:19 am

I really appreciate all the great advice. I have read the newsletter and it’s mainly just Fidelity funds, so nothing really extreme or anything. I guess my main issue is, and please tell me if I’m drawing a poor conclusion or if I’m misunderstanding, if I invest in a 5-6 sector funds, various large cap and small cap funds, and multiple international funds -having 20-30 funds in all- wouldn’t I be basically going the long way around to Index the market. I would just be indexing it myself the hard way and more expensively. Because once you get that diversified it’s getting closer to what an index of the market would return? Is that roughly the correct way to look at it?

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Re: Newsletter vs. Indexing

Post by JBTX » Fri Oct 06, 2017 9:45 am

Look at it this way. If they could really beat the market by 50%, then the newsletter writer should be filthy rich. Why then is he wasting time writing and selling a newsletter?

You've been using his recommendations for a while. How has your portfolio performed vs the S&P?

I suspect the author is taking funds that beat the market for a spell, and then saying they will continue to beat the market going forward. Also it isn't necessarily hard to beat the market when the market goes up. Just pile money into aggressive growth funds. That works fine until the market takes a downturn and those risky funds get clobbered much worse than the market.

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Re: Newsletter vs. Indexing

Post by pkcrafter » Fri Oct 06, 2017 12:07 pm

Jerzy, by investing in 20 funds you have probably diluted things to the point of not outperforming, if you ever were. Plus you have higher fund costs. Your Father-in-law has an even heavier drag as he is paying for the newsletters like Fidelity Advisor @ $200/year.

According to behavioral finance professor Meir Statman, there are 3 kinds of information out there: exclusive (insider info), narrowly available information, and widely known information. Newsletter writers don't have access to exclusive information, but maybe some narrowly available information. Your F-I-L only has access to the information most everyone else has.

One other point; it isn't difficult to find/know the active Fidelity funds that have good historical returns (widely know information). You don't need a newsletter to know which ones have been good.

Paul Merriman discusses newsletters

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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Re: Newsletter vs. Indexing

Post by JBTX » Fri Oct 06, 2017 2:29 pm

I wonder if it is this fidelity newsletter which apparently is one of the few that has beaten the market for some time. ... funds.html

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