Another silly anti-index article
Another silly anti-index article
http://www.marketwatch.com/story/troubl ... lcountdown
General theme is that active funds better protect capital in downturns. Of course downside protection is not the role for the equity side of your portfolio. This is about as intellectual as the active side can get...it is a pretty weak defense of paying, in perpetuity, 1-2% for idle cash that many times approaches 20% or more of a funds holdings.
General theme is that active funds better protect capital in downturns. Of course downside protection is not the role for the equity side of your portfolio. This is about as intellectual as the active side can get...it is a pretty weak defense of paying, in perpetuity, 1-2% for idle cash that many times approaches 20% or more of a funds holdings.
Last edited by BogleMe on Tue Dec 30, 2014 10:34 am, edited 2 times in total.
Re: Another silly anti index article
Great !!!
Market veteran gives stockpickers the edge in a downturn
Yeah, right, that's why they did so great during the 2008 financial markets debacle.
Market veteran gives stockpickers the edge in a downturn
Yeah, right, that's why they did so great during the 2008 financial markets debacle.
~ Member of the Active Retired Force since 2014 ~
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Re: Another silly anti index article
Classic XKCD:
Last edited by nisiprius on Tue Dec 30, 2014 12:16 pm, edited 1 time in total.
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Re: Another silly anti index article
Brilliant cartoon Nisiprius. Is it repostable?
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The Bear Market Myth
Bogleheads:
This article continues the MYTH that the average actively-managed fund outperforms in bear markets. The facts are opposite.
For more than 10 years the S&P Indices Versus Active studies (SPIVA®) have been
measuring the performance of actively managed funds against their relevant S&P index benchmarks. This is their conclusion:
Happy Holiday!
Taylor
This article continues the MYTH that the average actively-managed fund outperforms in bear markets. The facts are opposite.
For more than 10 years the S&P Indices Versus Active studies (SPIVA®) have been
measuring the performance of actively managed funds against their relevant S&P index benchmarks. This is their conclusion:
S&P INDICES VERSUS ACTIVE FUNDS (SPIVA) SCORECARDBear markets should generally favor active managers. Instead of being 100% invested in a market that is turning south, active managers would have the opportunity to move to cash, or seek more defensive positions. Unfortunately, that opportunity does not often translate to reality. In the two true bear markets the SPIVA Scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks.
Happy Holiday!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Another silly anti index article
I would have to disagree with this. It just makes common sense to reduce the risk on the riskiest part of your portfolio.BogleMe wrote:http://www.marketwatch.com/story/troubl ... lcountdown
General theme is that active funds better protect capital in downturns. Of course downside protection is not the role for the equity side of your portfolio. This is about as intellectual as the active side can get...it is a pretty weak defense of paying, in perpetuity, 1-2% for idle cash that many times approaches 20% or more of a funds holdings.
I actually own three funds, two active and one passive, that trade along these lines of reducing downside risk. Their 2008 records:cfs wrote:Great !!!
Market veteran gives stockpickers the edge in a downturn
Yeah, right, that's why they did so great during the 2008 financial markets debacle.
VFIAX -36.97%
PRWCX -27.17%
NSEIX -23.59%
BRLIX -33.30%
Over 10 and 15 years, the two active funds are ahead and the passive slightly behind (NSEIX/BRLIX results are probably affected somewhat by midcap/megacap tilts).
Re: Another silly anti index article
Active fund downside risk depends on the manager's style, types of holdings, and so on. I don't think we should lump all active management together when discussing certain attributes of performance.
And who seriously proposes that equity index funds are necessarily safer? (safer than many active managerial styles, sure, but carrying the market and factor risks of the index tracked) A passive investor's downside protection comes from reducing predictable amounts of market exposure through strategic asset allocation that includes safer securities.
And who seriously proposes that equity index funds are necessarily safer? (safer than many active managerial styles, sure, but carrying the market and factor risks of the index tracked) A passive investor's downside protection comes from reducing predictable amounts of market exposure through strategic asset allocation that includes safer securities.
Index funds suffer greater losses in a market decline?
[Thread merged into here, see below. --admin LadyGeek]
Just read this article on marketwatch.com. I don't quite understand it. What do you think?
http://www.marketwatch.com/story/troubl ... eid=yhoof2
Just read this article on marketwatch.com. I don't quite understand it. What do you think?
http://www.marketwatch.com/story/troubl ... eid=yhoof2
Re: Index funds suffer greater losses in a market decline?
I skimmed the article and didn't spot any empirical data supporting his hypothesis. Did you?
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Index funds suffer greater losses in a market decline?
There is quite the debate going on in the comments section of that article. Let's just say that nobody is changing the other side's mind.
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Re: Index funds suffer greater losses in a market decline?
Seems to be the same junk they've peddled before. Why do you read this stuff? It is 100% baloney.
1) Active funds keep more cash so they lose less money during bear markets. True but irrelevant. You invest for the long term and you can't predict bear markets, so this has no practical meaning.
2) Index funds are market-cap weighted but investors are better off tilting to small-cap funds. Kind of true -- the "but" makes it wrong though. The best way to tilt to small-cap is with index funds. This is a stupid canard.
3) Index fund owners engage in panic-selling, whereas active managers are smarter than that. Some truth to this statement but completely wrong regarding the implication. We know that many index fund owners buy and sell at the wrong time. They buy the right product but they don't know how to do it right. They buy high when everything looks rosy and then they cash out at the trough because they are sickened by the experience. Professional money managers don't make this mistake so much. Instead, they make other mistakes. But the advice is 100% idiotic, self-serving and harmful. If this were a regulated profession the author should be sued for malpractice. If you have a patient whose disease is panic selling, the remedy is not getting them to shift from index to managed funds; it is getting them educated about the markets and their own tolerance for risk, and then adjusting their index fund holdings so they don't engage in panic selling. As far as I know there is no evidence whatsoever that owners of index funds engage in panic selling more often than owners of actively managed funds. So the argument is specious.
Don't read this newsletter!
1) Active funds keep more cash so they lose less money during bear markets. True but irrelevant. You invest for the long term and you can't predict bear markets, so this has no practical meaning.
2) Index funds are market-cap weighted but investors are better off tilting to small-cap funds. Kind of true -- the "but" makes it wrong though. The best way to tilt to small-cap is with index funds. This is a stupid canard.
3) Index fund owners engage in panic-selling, whereas active managers are smarter than that. Some truth to this statement but completely wrong regarding the implication. We know that many index fund owners buy and sell at the wrong time. They buy the right product but they don't know how to do it right. They buy high when everything looks rosy and then they cash out at the trough because they are sickened by the experience. Professional money managers don't make this mistake so much. Instead, they make other mistakes. But the advice is 100% idiotic, self-serving and harmful. If this were a regulated profession the author should be sued for malpractice. If you have a patient whose disease is panic selling, the remedy is not getting them to shift from index to managed funds; it is getting them educated about the markets and their own tolerance for risk, and then adjusting their index fund holdings so they don't engage in panic selling. As far as I know there is no evidence whatsoever that owners of index funds engage in panic selling more often than owners of actively managed funds. So the argument is specious.
Don't read this newsletter!
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Re: Index funds suffer greater losses in a market decline?
Are you surprised that being 100% in the market during a downturn may mean greater loss than being less than 100% exposed to the market? The usual useless jibberish, IMO.
Best regards, -Op |
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Re: Index funds suffer greater losses in a market decline?
There you go, the new slogan:
"We don't gain more, but we lose less."
It's quite possible. Underperforming (gaining less) on the upside may mean underperforming (losing less) on the downside. That, for example, is what DCA predictably does. Edit: Cash drags both ways.
L.
"We don't gain more, but we lose less."
It's quite possible. Underperforming (gaining less) on the upside may mean underperforming (losing less) on the downside. That, for example, is what DCA predictably does. Edit: Cash drags both ways.
L.
Last edited by Leeraar on Tue Dec 30, 2014 12:43 pm, edited 1 time in total.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Index funds suffer greater losses in a market decline?
Actively-managed funds suffer greater losses in a market rise.
My spouse's 401(k) plan has the Madoff option where the advisor gets to manage any assets put in this option. It is down about 10% for 2014 despite the S&P 500 being up about 15%.
My spouse's 401(k) plan has the Madoff option where the advisor gets to manage any assets put in this option. It is down about 10% for 2014 despite the S&P 500 being up about 15%.
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Re: Index funds suffer greater losses in a market decline?
I don't see the logic. They gain less on the way up because they pick winners inaccurately and have high fees. On the way down they are still picking the wrong stocks and still have higher fees, but they get a little boost by holding higher cash reserves, which does lower losses compared to being fully invested. But there's no mathematical way that benefit can offset the negatives, any more than trying to drive a car with three wheels will work any better if you have a good muffler.Leeraar wrote:There you go, the new slogan:
"We don't gain more, but we lose less."
It's quite possible. Underperforming (gaining less) on the upside may mean underperforming (losing less) on the downside. That, for example, is what DCA predictably does.
L.
Re: Index funds suffer greater losses in a market decline?
I didn't say it's a good argument.
L.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Index funds suffer greater losses in a market decline?
Duplicate thread. See viewtopic.php?f=10&t=154198
Harry Sit has left the forums.
Re: Another silly anti index article
FYI - I merged zrzhu111's thread into here.
Also, nisiprius is using inline linking (the browser is displaying the image directly from the website), which constitutes fair use of copyright. Linking to Copyrighted Materials
For completeness, the image is from xkcd.
Also, nisiprius is using inline linking (the browser is displaying the image directly from the website), which constitutes fair use of copyright. Linking to Copyrighted Materials
For completeness, the image is from xkcd.
Re: Another silly anti index article
Original site link.Pizzasteve510 wrote:Brilliant cartoon Nisiprius. Is it repostable?
For those new to XKCD, hover your cursor over the image. Alt-text pops up as a sort of secondary caption.
The page itself gives instructions for linking and embedding the image.
cfs wrote:Great !!!
Market veteran gives stockpickers the edge in a downturn
Yeah, right, that's why they did so great during the 2008 financial markets debacle.
He knows how to navigate severe downturns, and yet he's still just a newsletter editor and "money manager?" (I manage money too, though it's mainly my own. Can I get similar billing?) If he was around for the dot-com bust and the 2009 recession, he should own at least one superyacht by now.James Stack, a widely respected investment newsletter editor and money manager...
Buy and hold. So yes, they probably will wait longer to sell.While active managers will sell stock on the way down, the sense of security engendered by index funds may lead shareholders to wait longer to sell, prolonging the decline.
Prolonging the decline? If it's passive indexing, shouldn't it inherently have little effect on the duration of a downturn?
Re: Another silly anti index article
Maybe an active manager gets lucky and shields their investors from the next market crash before it happens, but are they going to get lucky AGAIN and re-enter the market at the lowest point? That's where I'm doubtful
WWJD - What Would Jack Do?
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Re: Another silly anti index article
Rest of the article doesn't make much sense but this argument needs to be addressed.
I guess counter argument is: If/when index funds become dominant, opportunity for some sort of arbitrage will come up and market forces will determine the balance.Also, with index funds accounting for so much of new investment, how soon will it be before they become so dominant that effectively no one is setting prices for stocks beyond a minority of active managers, day traders, computer algorithms and investment bank proprietary trading desks? That could mean prices being determined even more by momentum and less by intrinsic value based on economic and corporate fundamentals.
Re: Another silly anti index article
Yes, Bernstein thinks it will shake out about 50/50 active/passive.
Re: Another silly anti index article
I subscribe to James Stack's newsletter, and saw his anti-index item about 2 weeks ago - and agreed with him, of course. He's a pretty conservative guy overall, about 80% invested and giving the bull market "the benefit of the doubt." You'd be unwise to bet against him.
Re: Another silly anti index article
I used to buy track records. Never could figure out how to buy them retroactive to when they started.ANC wrote: I actually own three funds, two active and one passive, that trade along these lines of reducing downside risk. Their 2008 records:
VFIAX -36.97%
PRWCX -27.17%
NSEIX -23.59%
BRLIX -33.30%
Over 10 and 15 years, the two active funds are ahead and the passive slightly behind (NSEIX/BRLIX results are probably affected somewhat by midcap/megacap tilts).
"have more than thou showest, |
speak less than thou knowest" -- The Fool in King Lear
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Re: Another silly anti index article
The title of the article, "How index funds misleads investors" provided enough info for me.
Although I do think Stack, who provides comprehensive historical information, gave interesting insight to money flows into index funds.
RM
Although I do think Stack, who provides comprehensive historical information, gave interesting insight to money flows into index funds.
RM
I figure the odds be fifty-fifty I just might have something to say. FZ
is there any truth in this?
[Thread merged into here, see below. --admin LadyGeek]
How index funds mislead investors
http://www.marketwatch.com/story/troubl ... 2014-12-30
How index funds mislead investors
http://www.marketwatch.com/story/troubl ... 2014-12-30
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Re: is there any truth in this?
Already a post on this. viewtopic.php?f=10&t=154198&newpost=2313704
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Re: Another silly anti index article
I'll go out on a limb here and say in a way the article is true and informative for a certain type of investor.
For us, we set our AA and have bonds to limit losses.
Some investors use mutli-asset funds though. American Funds is a prime example. In that case, just switching to index funds is not the solution.
Of course active isn't the solution either. So really the article should be titled "index funds need bonds" or something along those lines, and then properly explain about setting an AA.
For us, we set our AA and have bonds to limit losses.
Some investors use mutli-asset funds though. American Funds is a prime example. In that case, just switching to index funds is not the solution.
Of course active isn't the solution either. So really the article should be titled "index funds need bonds" or something along those lines, and then properly explain about setting an AA.
Re: Another silly anti index article
The argument that active funds reduce losses in down markets has been debunked many times and is obviously silly. But the point about the market behaving differently in the future because of more and more assets being held by index investors and etfs is plausible. 50 years ago the stock market was the sum of many stock pickers. In the future the stock market will act like many holders of indices and a few stock pickers and computer traders. I don't know how that will affect the market, but I'm sure it will affect it somehow. Maybe in the future we will see even greater herd like behavior than before.
Last edited by selters on Wed Dec 31, 2014 10:13 am, edited 1 time in total.
Re: Another silly anti-index article
I merged subham's thread into here. I also changed the thread title from "anti index" to "anti-index".
Re: Another silly anti-index article
Another silly "Another silly anti-index article" thread.
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Re: Another silly anti-index article
Since an index fund tracks an index, it is true that "an [index fund] investor will experience all of the losses in the market index."
It is therefore vacuously true that any investor who does not experience all the losses in the market index cannot be indexing.
Corollary: all funds that do not experience all of the losses in the market index must be actively managed funds.
But of course, the inverse is not true. All funds that protect capital in a downturn better than index funds are active funds, but not all active funds better protect capital in a downturn.
For example, this one didn't:
Source: Morningstar
So it's the same old problem. How do you know which active funds will?
It is therefore vacuously true that any investor who does not experience all the losses in the market index cannot be indexing.
Corollary: all funds that do not experience all of the losses in the market index must be actively managed funds.
But of course, the inverse is not true. All funds that protect capital in a downturn better than index funds are active funds, but not all active funds better protect capital in a downturn.
For example, this one didn't:
Source: Morningstar
So it's the same old problem. How do you know which active funds will?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Another silly anti-index article
Obviously, it's easy to tell which active funds that will provide protection in downturns. Just use the ones that say they will. For example, this 2007 JPMorgan Chase document says
You can decide whether a fall to $6,134, instead of $6,238, can be considered "downside protection."
Source: Morningstar
Here, then, is the comparative performance of JPMorgan SmartRetirement 2040, SMTIX, and Vanguard Target Retirement 2040, VFORX.For instance, we developed a series of target date funds with a focus on downside protection, to address the fact that overly aggressive allocations may negatively affect participants who retire during unfavorable markets or have less than ideal investing habits. Our target date funds include alternative asset classes, which seek to provide the additional diversification that captures alpha and helps reduce risk.
You can decide whether a fall to $6,134, instead of $6,238, can be considered "downside protection."
Source: Morningstar
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Another silly anti-index article
actually the JP Morgan actively managed fund in my 401k has been doing pretty well, beating the S&P
ticker is JGACX - JPMorgan Growth Advantage Fund Class C
ticker is JGACX - JPMorgan Growth Advantage Fund Class C
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Re: Another silly anti-index article
Removed by OP
Last edited by Pizzasteve510 on Thu Jan 01, 2015 11:48 pm, edited 1 time in total.
Re: Another silly anti-index article
LMVTX - Legg Mason ClearBridge Value C fund is still in business. ER 1.76%, 12b1 fee .95, back end load of .95%, turnover 40%.nisiprius wrote:Corollary: all funds that do not experience all of the losses in the market index must be actively managed funds.
But of course, the inverse is not true. All funds that protect capital in a downturn better than index funds are active funds, but not all active funds better protect capital in a downturn.
For example, this one didn't: graph of LMVTX
So it's the same old problem. How do you know which active funds will?
10-yr return 1.89% vs. Vg Total Stock of 8.08%, according to the internet.
HOW do these funds STAY IN BUSINESS?? Who buys them?
Re: Another silly anti-index article
This has bothered me a lot as one of the downsides of market weighted index. Is there a proven index that came out winning over market weighted index? Or is there a fundamental flaw in this reasoning?Index funds can also suffer from their emphasis on momentum over value. Benchmark indexes tend to be capitalization weighted; the highest allocations go to the market’s largest companies. As investors make big stocks, such as Apple AAPL, -0.18% and Google GOOG, -0.30% , bigger, the stocks become bigger parts of indexes, so when investment in index funds rises, even more money goes into those stocks, Stack points out.
Re: Another silly anti-index article
12b-1 fee of 0.95% explains exactly how they stay in business. If I'm an financial advisor, what do I care if my client's funds grow? I get 0.95% kickback and another 1% on top of that without lifting a finger.Miriam2 wrote:LMVTX - Legg Mason ClearBridge Value C fund is still in business. ER 1.76%, 12b1 fee .95, back end load of .95%, turnover 40%.nisiprius wrote:Corollary: all funds that do not experience all of the losses in the market index must be actively managed funds.
But of course, the inverse is not true. All funds that protect capital in a downturn better than index funds are active funds, but not all active funds better protect capital in a downturn.
For example, this one didn't: graph of LMVTX
So it's the same old problem. How do you know which active funds will?
10-yr return 1.89% vs. Vg Total Stock of 8.08%, according to the internet.
HOW do these funds STAY IN BUSINESS?? Who buys them?
Re: Another silly anti-index article
The answer is buried in your question! (I'm referring to the word 'fundamental'). I'm sure, by now, that you are aware of the 2 basic schools of indexing. The popular capweighted, broad index based investing as in the 3 or 4 fund portfolio advocated by John Bogle, perhaps Malkiel, Allan Roth and of course, Taylor Larimore. The other is tilting to small and value based on academic research of Fama and French (complicated recently by introduction of new factors such as momentum and profitability) advocated by many experts such as Larry Swedroe, Rick Ferri (almost reluctantly), William Bernstein, Bill Schultheis, Robert T. Fundamental indexes are a variation of this popularized by Arnott.subham wrote:This has bothered me a lot as one of the downsides of market weighted index. Is there a proven index that came out winning over market weighted index? Or is there a fundamental flaw in this reasoning?Index funds can also suffer from their emphasis on momentum over value. Benchmark indexes tend to be capitalization weighted; the highest allocations go to the market’s largest companies. As investors make big stocks, such as Apple AAPL, -0.18% and Google GOOG, -0.30% , bigger, the stocks become bigger parts of indexes, so when investment in index funds rises, even more money goes into those stocks, Stack points out.
But, of course, after 110 posts, you already know all this.
Re: Another silly anti-index article
Thanks for bring back the perspectivevencat wrote:The answer is buried in your question! (I'm referring to the word 'fundamental'). I'm sure, by now, that you are aware of the 2 basic schools of indexing. The popular capweighted, broad index based investing as in the 3 or 4 fund portfolio advocated by John Bogle, perhaps Malkiel, Allan Roth and of course, Taylor Larimore. The other is tilting to small and value based on academic research of Fama and French (complicated recently by introduction of new factors such as momentum and profitability) advocated by many experts such as Larry Swedroe, Rick Ferri (almost reluctantly), William Bernstein, Bill Schultheis, Robert T. Fundamental indexes are a variation of this popularized by Arnott.subham wrote:This has bothered me a lot as one of the downsides of market weighted index. Is there a proven index that came out winning over market weighted index? Or is there a fundamental flaw in this reasoning?Index funds can also suffer from their emphasis on momentum over value. Benchmark indexes tend to be capitalization weighted; the highest allocations go to the market’s largest companies. As investors make big stocks, such as Apple AAPL, -0.18% and Google GOOG, -0.30% , bigger, the stocks become bigger parts of indexes, so when investment in index funds rises, even more money goes into those stocks, Stack points out.
But, of course, after 110 posts, you already know all this.
So the issue remains unsettled!
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Re: Another silly anti-index article
No, no, no. You aren't hip to the factor jive. Fama and French's five-factor model involves "the market factor RM-RF, the size factor SMB, the profitability factor RMW (robust minus weak) and the investment factor CMA (conservative minus aggressive)." They don't recognize momentum, that's somebody else's factor. And they now consider the value factor, HML, "redundant."vencat wrote:...The other is tilting to small and value based on academic research of Fama and French (complicated recently by introduction of new factors such as momentum and profitability)...
(Added: the momentum factor seems to be due to Mark Carhart. The history is summarized by Larry Swedroe).
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Re: Another silly anti-index article
Easy. Just out fox the box.nisiprius wrote:
So it's the same old problem. How do you know which active funds will?
I'll take the three fund for the long haul. I'd rather not spend decades wondering when my factor bet was going to pay off or when my stock jockey's streak will end.