index funds vrs. active managed funds

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invhelpme
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index funds vrs. active managed funds

Post by invhelpme » Sun Apr 04, 2010 7:35 pm

I am new to the forum and I desperately need some advice from all of you. I have an IRA with Fidelity and am wondering if I should roll it over to Vangaurd and invest mostly in low-cost index funds. I know perfomance is no guarantee of future results but one still can look at past performance somewhat. All the reseach shows that index funds out perfom managed funds 80% of the time. With most of the Fidelity Funds I own, i.e. Contrafund, Low Price Stock, ect., these funds total return beat their indexes almost every year. If you look at 10 yr. or lifetime performance, these managed funds shatter all their indexes. Why would anyone invest in these index funds because of low expenses when it is irrelevant because the managed funds beat them anyway? You are still making more in the end no matter what the expenses are. Someone please give me some insight. Are index funds just a bunch of hype?
Last edited by invhelpme on Sun Apr 04, 2010 8:23 pm, edited 1 time in total.

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Re: index funds vrs. active managed funds

Post by tibbitts » Sun Apr 04, 2010 8:00 pm

invhelpme wrote:I am new to the forum and I desperately need some advice from all of you. I have an IRA with Fidelity and am wondering if I should roll it over to Vangaurd and invest mostly in low-cost index funds. I know perfomance is no guarantee of future results but one still can look at past performance somewhat. All the reseach shows that index funds out perfom managed funds 80% of the time. With most of the Fidelity Funds I own, i.e. Contrafund, Low Price Stock, ect., these funds total return beat their indexes almost every year. If you look at 10 yr. or lifetime performance, these managed funds shatter all their indexes. Why would any on invest in these index funds because of low expenses when it is irrelevant because the managed funds beat them anyway? You are still making more in the end no matter what the expenses are. Someone please give me some insight. Are index funds just a bunch of hype?
Unlike most members of the forum, I don't think it's possible to explain this. What you have to do is to go through the experience that most of us have: carefully research the available funds, select the "best" with long track records of compelling performance, and... sit back and watch them underperform their index benchmarks year after year, pretty much starting from the date we first purchase them. Until that happens to you a few times, you just won't get it. You'll believe that anyone can look at the "obvious" evidence and select funds that will outperform.

Of course it is possible that you'll be either skilled or lucky, and your selected funds will outperform.

Ultimately, it comes down to the fact that investing seems to be different from almost all other human endeavors, in that hard work and experience doesn't seem to reliably translate into superior results.

Paul

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grabiner
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Re: index funds vrs. active managed funds

Post by grabiner » Sun Apr 04, 2010 8:26 pm

invhelpme wrote: With most of the Fidelity Funds I own, i.e. Contrafund, Low Price Stock, ect., these funds total return beat their indexes almost every year. If you look at 10 yr. or lifetime performance, these managed funds shatter all their indexes.
Note that you are looking at only the funds you chose, not at all the funds you might have chosen. Fidelity (and Vanguard, for that matter) has a large selection of funds, so you expect that some will perform well and some poorly every year. If you chose funds five years ago based on past performance, then it isn't at all surprising that those funds have a good ten-year performance record. Even if you got no benefit because they were only average over the five years you held them, they would have good ten-year performance by averaging in the previous five years.

Good Vanguard examples are Windsor and Windsor II; both funds tracked Value Index almost perfectly over the last five years, but beat it by 6% a year over the previous five. US Growth has done the same from the other direction; it has tracked Growth Index over the last five years, but its disastrous 2000-2004 makes it the Vanguard fund with the worst 10-year record. (And before that disaster, it was one of Vanguard's best funds; anyone buying it in 1998-2000 based on the outstanding 1988-1997 record was badly disappointed.)

The most important issue is not index or active, nor Vanguard or Fidelity, but investment philosophy and cost. If you can find a low-cost fund which fits your investment philosophy and needs, then you probably want to hold that fund. I held Windsor for several years based on that philosophy; I was willing to pay the very small extra cost for a better exposure to deep value (which the fund no longer has, and in any case, that retirement plan dropped Vanguard as a provider). I still hold International Explorer in my IRA, because it has lower cost than the corresponding index.
Wiki David Grabiner

invhelpme
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Thanks Paul

Post by invhelpme » Sun Apr 04, 2010 8:30 pm

Thanks for answering me back Paul but I still didn't get my question answered. I see what you are saying that all the research may be meaningless if the past performance isn't repeated again. Isn't anything that Dan Wiener says is true? Look at the Windsor fund. It has beaten its index and that of the 500 as well. I still don't get it. Daren

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Post by woof755 » Sun Apr 04, 2010 8:32 pm

Another beautiful thing about index funds is their purity. If you are trying to maintain a certain percentage of your portfolio in large / small / domestic / international / value you can do this purely with a few index funds.

With actively managed funds, which are moving all over the place from year to year, adding international when they want to, going small / going to value, I imagine it to be difficult to know what your portfolio is or will be the next year.

But, there's nothing wrong with buying and holding a low expense ratio actively managed fund.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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Post by livesoft » Sun Apr 04, 2010 8:34 pm

Suppose a fund always had 4% cash and 96% invested in its index. Would it not have beaten its index if one looks at the past 10-year period?

Tell me about Fidelity contra. What is its index that it compares itself to?
Last edited by livesoft on Sun Apr 04, 2010 8:35 pm, edited 1 time in total.

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Taylor Larimore
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Past Performance

Post by Taylor Larimore » Sun Apr 04, 2010 8:35 pm

Hi:

Welcome to the Bogleheads Forum!
If you look at 10 yr. or lifetime performance, these managed funds shatter all their indexes. Why would anyone invest in these index funds because of low expenses when it is irrelevant because the managed funds beat them anyway? -- Someone please give me some insight.
I trust this is the "insight" you are looking for:

Past Performance
"Simplicity is the master key to financial success." -- Jack Bogle

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sometimesinvestor
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Post by sometimesinvestor » Sun Apr 04, 2010 8:40 pm

Ken Heebner had a great record from 2000-2007 in his cgm fund and the manager of Fidelity's leveraged company stock fund had a similar great record from 2002-2007 but both failed badly in 2008. i.e past performance doesn't always promise future performance
There is some evidence that the management of both Contrafund and Low priced stock are superb mangers but they might be a dispointment in the future.
A problem with FIdo is that they are not shareholder friendly in that they delay closing funds that are getting too big.
However both funds have been closed in the past though they are both currently open. A market timing rule for those funds that has worked in the past (bogleheads don't generally like market timing but this one might work for those funds) is get out when they announce the funds is closing to new investors. Basically that means that the managerss think the fund is getting too hard to manage and they know more than you do.

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Post by invhelpme » Sun Apr 04, 2010 8:46 pm

To livesoft -great point about what index to compare Contra to. It owns mostly large but also has some medium, small and a little international. What does it matter what index to compare it to if you had bought the 500 index and it still beats it over the last 10 years? Thank you so much for the reply. Daren

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Post by invhelpme » Sun Apr 04, 2010 8:50 pm

To sometimes investor - Thank you for the reply. Your right about Fido gettting to big before they close a fund. The managers at Conta and Low Price Stock have a stellar performance record but your right. No one knows if they can keep it up. Daren

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Re: index funds vrs. active managed funds

Post by YDNAL » Sun Apr 04, 2010 8:51 pm

invhelpme wrote:All the reseach shows that index funds out perfom managed funds 80% of the time. With most of the Fidelity Funds I own, i.e. Contrafund, Low Price Stock, ect., these funds total return beat their indexes almost every year.
invhelpme,

The Fidelity Contrafund...
Yahoo! Finance wrote:FUND SUMMARY
The investment seeks capital appreciation. The fund normally invests primarily in common stocks. It may invest in securities of companies whose value is not fully recognized by the public. The fund invests in both domestic and foreign issuers. It may invest in "growth" stocks or "value" stocks or both. The advisor uses fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments.
1) Do you know what it held 5 years ago, or 10 years ago? These are today's top-10 holdings that represent 30% of the fund.
TOP 10 HOLDINGS ( 29.82% OF TOTAL ASSETS)

Company.. Symbol.. % Assets.. YTD Return %
Google Inc. GOOG 5.60 -14.08
Apple Inc. AAPL 4.87 -0.83
BRK.A 3.83 23.79
Wells Fargo & Company Common St WFC 3.48 1.52
Coca-Cola Company (The) Common KO 2.39 -6.54
McDonald's Corporation Common S MCD 2.27 3.35
Visa Inc. Visa Inc. V 2.13 -0.59
Gilead Sciences, Inc. GILD 1.91 9.80
Walt Disney Company (The) Commo DIS 1.71 -2.20
Noble Energy Inc. Common Stock NBL 1.63 3.24
2) What index do you benchmark for comparative 10-year results?
Last edited by YDNAL on Sun Apr 04, 2010 8:52 pm, edited 1 time in total.
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livesoft
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Post by livesoft » Sun Apr 04, 2010 8:51 pm

Contra has a substantial amount of foreign stocks. It is a growth stock fund. The S&P500 is a large-cap blend index with no cash that is not directly comparable to Fidelity Contrafund.

Your question about "What does it matter?" is revealing. For a $10,000 investment, why don't I just write that the Vanguard index fund returned over $17,750 over the last 10 years, when Fidelity Contrafund returned only $13,300 or so? You missed out on a further 40% growth by not using an index fund.

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Post by invhelpme » Sun Apr 04, 2010 8:53 pm

Thanks to all that have replied. This is my first time on the forum and I love it!!!! This is crazy. I already have been helped somewhat. I need someone to convince me without a doubt that indexing is the way to go. Wiener says it is all hype and propaganda. Who do I believe? Who can anyone trust?

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Re: Thanks Paul

Post by tibbitts » Sun Apr 04, 2010 9:03 pm

invhelpme wrote:Thanks for answering me back Paul but I still didn't get my question answered. I see what you are saying that all the research may be meaningless if the past performance isn't repeated again. Isn't anything that Dan Wiener says is true? Look at the Windsor fund. It has beaten its index and that of the 500 as well. I still don't get it. Daren
My answer is that you didn't have the experience of lump summing your initial investment into Vanguard Windsor just in time for 1988. I did. There are some things you have to experience for yourself. Honestly, I don't know, in retrospect, if Windsor recovered (relative to a suitable benchmark) in five years, or ten years, or... never. It's hard to measure, because of how the fund evolved. Windsor was essentially a mid-cap fund it its heyday. Even in my early days in the fund, I believe John Neff (and I won't even go into the issues of fund manager turnover) didn't own even one of the fifty largest-cap stocks of the day. You might compare that to today's holdings in the fund. So what benchmark do you use, and when you do change it? And then there is the decision of whether - and when - to give up on your carefully selected fund. Some will bounce back after a year or two of even fairly dramatic underperformance. Some will seem like their luck ran out on the day your bought them, and never do. Holding them is like getting beaten over the head day after day, month after month. I owned another fund, carefully selected for its long history of solid performance, that seemed to fit that description: Vanguard U.S. Growth. I'm guessing you wouldn't choose it today, but I'm guessing you might have chosen it when I did. I'll let you research that story on your own...

Paul

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Post by invhelpme » Sun Apr 04, 2010 9:12 pm

Thanks Paul, I'm aware of what Vangaurd Growth fund's returns look like and you are right. What I see though is if you look at a Morningstar performance chart and compare Fidelity Low Price Stock which is a small to midcap blend, to Vangaurd's small or small value stock and if you put in $10,000 15 years ago and held it, it beat the Vangaurd Funds hands down. This is what I don't understand. I am a buy and hold person.

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Post by tibbitts » Sun Apr 04, 2010 9:12 pm

Who do I believe? Who can anyone trust?
That was my point: you will only trust your own experiences. What you believe will depend upon what happens when you invest your own money and experience the results for yourself.

Paul

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Post by invhelpme » Sun Apr 04, 2010 9:16 pm

By then it will be to late and I will have either failed miserably or done very well. It is so confusing. I am wasting too much time researching funds. It is stupid. If I go to Edward Jones they say buy my funds. They are actively managed. They will beat the market almost every year.

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Post by invhelpme » Sun Apr 04, 2010 9:22 pm

Does anyone out there trust Dan Wiener and his advice or is it just a bunch of crap? Also I would like some advice about a 60% stock/40% bond porfolio of both index and active-managed funds. Does anyone know which funds Dan uses?

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Post by tibbitts » Sun Apr 04, 2010 9:41 pm

invhelpme wrote:Thanks Paul, I'm aware of what Vangaurd Growth fund's returns look like and you are right. What I see though is if you look at a Morningstar performance chart and compare Fidelity Low Price Stock which is a small to midcap blend, to Vangaurd's small or small value stock and if you put in $10,000 15 years ago and held it, it beat the Vangaurd Funds hands down. This is what I don't understand. I am a buy and hold person.
And I've held Windsor for more than twenty years, so your point is....?

And I've held Fidelity Low Price stock for the majority of its lifetime, except for a brief period. It hasn't been a particularly bad experience for me. But, graph it against something at least somewhat similar (which is hard to find - again, consider how the style has drifted over the years.) What you'll see is that there are very brief periods of serious outperformance, and then the lines of the graph pretty much track each other (and sometimes even revert.) So, the performance you personally receive depends very much upon exactly when you bought the fund. In this fund's case, you might have significantly outperformed... or, pretty much kept pace. Incidentally, how long do you expect Joel Tillinghast to hang around? How long would you continue showing up for work every day if you had the assets he does, and you hit a bit of a rough patch? Would you keep the fund if he leaves? You're a buy-and-holder, eh? Once again, you may not have had the personal experience of repeatedly owning other successful (at least formerly...) Fidelity funds, and having your manager "promoted" to a consulting role after a long and illustrious career that seems to run off the rails at just about the moment you purchase the fund.

Paul

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Post by invhelpme » Sun Apr 04, 2010 9:47 pm

Paul, I think part of what you are saying then is that the performance of a fund varies so much with the date that you bought the fund. Also, I don't know if I would sell the fund or not if Joel T. left. Thanks again for all your help. Daren

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Post by tibbitts » Sun Apr 04, 2010 9:47 pm

invhelpme wrote:Does anyone out there trust Dan Wiener and his advice or is it just a bunch of crap? Also I would like some advice about a 60% stock/40% bond porfolio of both index and active-managed funds. Does anyone know which funds Dan uses?
Yes, some forum members follow the newsletter to which you refer, but they probably won't divulge for free copyrighted material that they pay hundreds of dollars to access. In fairness, some people enjoy the newsletter for the commentary, fund manager interviews, etc.

Paul

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Post by Avo » Mon Apr 05, 2010 12:47 am

invhelpme wrote: I don't know if I would sell the fund or not if Joel T. left.
Then I predict that you will ultimately underperform index funds. The ONLY reason to hold Joel T's fund is that there is some evidence that he adds value. I think this is true, and so I hold a lot of his fund. But, if he leaves, the chances that whoever Fido puts in his place will also add value are very, very low, MUCH too low to pay that fund's 1% expense ratio.

Wiener is trying to sell newsletters, period. If you can't decide for yourself which managers add value, then you don't know enough to use them. Buy index funds instead, and save the newsletter fees and active-management fees.

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Post by DIDX » Mon Apr 05, 2010 2:19 pm

The bottom line is that you own index funds because they are cheaper and over the LONG-TERM outperform most actively managed funds. Ten years is still too short of a time frame. Over the long-term (30+ years), cost has as much or more of an impact on your portfolio than asset allocation. This simply cannot be overlooked or stressed enough. the vast majority of actively managed funds do not beat index funds over the long-term. They may win in short-periods here and there, but that is only because they are overextending themselves in various sectors and unnecessarily increasing the risk of your portfolio. They also get hit harder in downturns because of fees. Actively managed funds try to convince you that their experts know when to get in and when to get out (market timing), but if it were so easy, wouldn't they be able to do it every single year? They also hold more cash than they should (in order to make these "timed" moves into different sectors). Why would you pay someone 1.5% - 2.0% to hold cash for you? Banks do that for free.

The last 10 years were abysmal for the S&P, and any actively traded fund could have simply beat this index by diversifying into international, bonds, cash, etc. That is why accurate benchmark comparisons are so important. Without them you might might make the mistake of owning an actively managed fund that in fact does not beat it's true benchmark. Manipulating performace and results is what they do best, it's how they get new clients.

Buy cheap, buy simple, buy index.

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Re: index funds vrs. active managed funds

Post by curly lambeau » Mon Apr 05, 2010 2:42 pm

invhelpme wrote:I am new to the forum and I desperately need some advice from all of you. I have an IRA with Fidelity and am wondering if I should roll it over to Vangaurd and invest mostly in low-cost index funds. I know perfomance is no guarantee of future results but one still can look at past performance somewhat. All the reseach shows that index funds out perfom managed funds 80% of the time. With most of the Fidelity Funds I own, i.e. Contrafund, Low Price Stock, ect., these funds total return beat their indexes almost every year. If you look at 10 yr. or lifetime performance, these managed funds shatter all their indexes. Why would anyone invest in these index funds because of low expenses when it is irrelevant because the managed funds beat them anyway? You are still making more in the end no matter what the expenses are. Someone please give me some insight. Are index funds just a bunch of hype?
You picked the funds that have beaten the index. This does not mean that managed funds beat index funds.

Did you pick those funds before or after they showed index-beating performance?

Where in your analysis are you accounting for the funds that outperformed their indexes for awhile, then underperformed? Who is the "you" that is "making more in the end"? Surely not active fund investors in aggregate. It sounds like the "you" is based in looking at the past and imagining what one ought to have invested in.

If you want to go with index funds I think you should just mind their expense ratios and keep them as low as possible. I think it is a dangerous error to say those don't matter since you will pick the funds that will outperform enough to make it irrelevant. I'm not sure why you think you have that skill because I am not seeing anything other than appeals to past performance here.

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Post by invhelpme » Mon Apr 05, 2010 7:56 pm

Thanks to all of you who took the time to reply. I have learned a great deal and you have opened my eyes about performance and index funds. Since my IRA is already at Fidelity does anyone think I should just invest in their Spartan Funds? Fido doesn't have many choices unlike Vangaurds index funds. Thanks again for all your help everyone. Daren

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Post by dkdoy » Mon Apr 05, 2010 8:12 pm

invhelpme wrote:Thanks to all of you who took the time to reply. I have learned a great deal and you have opened my eyes about performance and index funds. Since my IRA is already at Fidelity does anyone think I should just invest in their Spartan Funds? Fido doesn't have many choices unlike Vangaurds index funds. Thanks again for all your help everyone. Daren
Spartan funds are excellent, however, keep in mind International Index (FSIIX) does not contain emerging markets.

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