CNBC article - Low cost is just the first step in picking funds: Bogle

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navyitaly
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CNBC article - Low cost is just the first step in picking funds: Bogle

Post by navyitaly » Sat May 30, 2015 10:26 am

http://www.cnbc.com/id/102688265

Some more food for thought....

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Maynard F. Speer
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sat May 30, 2015 10:56 am

Bogle offering guidelines for picking active funds; Malkiel tactically investing in the bond market .. Now we just need Warren Buffett to open a gold and precious metals trust

I think the point about managers who own their own firms is very wise ..

Pick active funds run by managers who own their own firms, who follow distinctive philosophies—meaning, who don't merely shadow an index and then charge you more for it—and who invest for the long term. Look at a fund's portfolio holdings (especially the top 10 holdings) on the manager's website or through a fund research site like Morningstar.
"And remember to do your fishing from a low-cost pond"
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by MnD » Sat May 30, 2015 11:20 am

"A modest holding in a low-cost emerging market index fund is also a reasonable approach, but be sure you understand the risks," Bogle wrote in "The Little Book of Common Sense Investing."
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70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Uncle Pennybags
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Uncle Pennybags » Sat May 30, 2015 11:42 am

That article did more assuming about what Mr. Bogle said than what he actually said. IMHO he was speaking about the 10% “mad money” portion of a portfolio and not the 90% that should be in asset allocated in low cost index funds.

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Maynard F. Speer
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sat May 30, 2015 1:35 pm

Uncle Pennybags wrote:That article did more assuming about what Mr. Bogle said than what he actually said. IMHO he was speaking about the 10% “mad money” portion of a portfolio and not the 90% that should be in asset allocated in low cost index funds.
I don't think that's implied .. I think there are very good arguments against high fees, and closet trackers .. But even in an efficient market, a good manager can invest on a horizon or with a style suitable for someone's investment needs

e.g. Vanguard's own active funds have been consistently better long-term investments than their passive cousins (with most outperforming by over 1% a year) .. and a lot of Vanguard staff hold them in their pension funds
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Uncle Pennybags
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Uncle Pennybags » Sat May 30, 2015 8:40 pm

Maynard F. Speer wrote:e.g. Vanguard's own active funds have been consistently better long-term investments than their passive cousins (with most outperforming by over 1% a year) .. and a lot of Vanguard staff hold them in their pension funds
Really? We better change the investing philosophy of this forum.

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Maynard F. Speer
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sat May 30, 2015 9:06 pm

Uncle Pennybags wrote:Really? We better change the investing philosophy of this forum.
Perhaps we could change the name to the BogleHedge forum?
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

toto238
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by toto238 » Sat May 30, 2015 9:10 pm

Uncle Pennybags wrote:
Maynard F. Speer wrote:e.g. Vanguard's own active funds have been consistently better long-term investments than their passive cousins (with most outperforming by over 1% a year) .. and a lot of Vanguard staff hold them in their pension funds
Really? We better change the investing philosophy of this forum.
I think you might be talking about PRIMECAP, not available to anyone but employees, flagship, or some of the rare others that have it in their 401k. Unless of course you grandfathered in before it closed. I don't know how they do what they do, but it's beautiful.

ThisTimeItsDifferent
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by ThisTimeItsDifferent » Sat May 30, 2015 9:18 pm

I was fortunate to get in Primecap 15-20 years ago just as it was closing but was still available to open as a taxable account for those whose 401ks had it available. I've done DCA into it twice a month ever since as a core holding.

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JoMoney
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by JoMoney » Sat May 30, 2015 9:25 pm

Uncle Pennybags wrote:
Maynard F. Speer wrote:e.g. Vanguard's own active funds have been consistently better long-term investments than their passive cousins (with most outperforming by over 1% a year) .. and a lot of Vanguard staff hold them in their pension funds
Really? We better change the investing philosophy of this forum.
It would be interesting to see, if we took all of Vanguard's active stock funds, weighted them somehow based some proportion of AUM, or even at equal weights, and looked at how the group of their active funds compared to the broad market index.
I haven't spent much time looking at it, but at a cursory glance, I can find plenty of Vanguard active funds that have under-performed the broad market index.
PRIMECAP outperformed, but Morgan underperformed
Equity Income outperformed, but Dividend Growth Fund underperformed
U.S. Value outperformed, but U.S. Growth underperformed

this was just from a specific time period that PortfolioVisualizer had data for, but I didn't seen any particular trend that would lead me to believe that "Most outperformed".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Taylor Larimore
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"The Arithmetic of Active Management"

Post by Taylor Larimore » Sat May 30, 2015 9:41 pm

JoMoney wrote:
It would be interesting to see, if we took all of Vanguard's active stock funds, weighted them somehow based some proportion of AUM, or even at equal weights, and looked at how the group of their active funds compared to the broad market index.
Nobel Laureate, William Sharpe wrote:
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 (underline mine).
The Arithmetic of Active Management

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

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Maynard F. Speer
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Re: "The Arithmetic of Active Management"

Post by Maynard F. Speer » Sat May 30, 2015 10:15 pm

Taylor Larimore wrote:JoMoney wrote:
It would be interesting to see, if we took all of Vanguard's active stock funds, weighted them somehow based some proportion of AUM, or even at equal weights, and looked at how the group of their active funds compared to the broad market index.
Nobel Laureate, William Sharpe wrote:
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 (underline mine).
The Arithmetic of Active Management

Best wishes.
Taylor
Non sequitur
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Maynard F. Speer
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sat May 30, 2015 10:26 pm

JoMoney wrote:It would be interesting to see, if we took all of Vanguard's active stock funds, weighted them somehow based some proportion of AUM, or even at equal weights, and looked at how the group of their active funds compared to the broad market index.
I haven't spent much time looking at it, but at a cursory glance, I can find plenty of Vanguard active funds that have under-performed the broad market index.
PRIMECAP outperformed, but Morgan underperformed
Equity Income outperformed, but Dividend Growth Fund underperformed
U.S. Value outperformed, but U.S. Growth underperformed

this was just from a specific time period that PortfolioVisualizer had data for, but I didn't seen any particular trend that would lead me to believe that "Most outperformed".
Over 15 years

Image

I imagine they just follow good investment practices: keep fees low, avoid closet trackers .. They probably tilt somewhat towards value and a more even cap-weighting
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: "The Arithmetic of Active Management"

Post by SpaceCowboy » Sat May 30, 2015 10:58 pm

Taylor Larimore wrote: Nobel Laureate, William Sharpe wrote:
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 (underline mine).
The Arithmetic of Active Management

Best wishes.
Taylor
The net of costs is the key, not the active / passive debate. (bold, underline are mine)
Costs are the key. In analyzing the active universe, one also should separately analyze the high active content funds versus the low active content closet index huggers which are very challenged to outperform.

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Uncle Pennybags
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Uncle Pennybags » Sat May 30, 2015 11:53 pm

Maynard F. Speer wrote:Image
I have no idea what that chart means. I can only find it used on money changer blogs. The devil is in the details.

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JoMoney
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by JoMoney » Sat May 30, 2015 11:55 pm

Maynard F. Speer wrote:...Over 15 years
... I imagine they just follow good investment practices: keep fees low, avoid closet trackers .. They probably tilt somewhat towards value and a more even cap-weighting
I imagine if measured over that specific 15 year period, which would have started in 2000 at the peak of the most recent 'large-cap era', that it's undoubtedly true that their active funds outperformed (at least of those that still exist). Although that doesn't say anything about how investors were actually investing and where the money was being put at that time.
Something that might be of note though, is some of the active funds that had the best performance over that period, have changed their styles at least with regard to size since then. I don't have data from 2000, but at least from 2003:

Vanguard Welington's Equity Portfolio:
Median Market Cap May-2003 $21.1B (vs $49.6B for the S&P500)
Median Market Cap Nov-2014 $97.9B (vs $75.1B for the S&P500)

Vanguard PRIMECAP Equity Portfolio:
Median Market Cap Aug-2003 $15.5B (vs $46.5B for the S&P500)
Median Market Cap March-2015 $61.7B (vs $79.3B for the S&P500)

It will be interesting (to me anyway) how these active funds compare when competing in a market segment closer to their benchmark, as well as how these active funds perform relative to "Factor Investors" who bet that static style factors are destined to persistently outperform.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Maynard F. Speer
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sun May 31, 2015 8:33 am

Uncle Pennybags wrote:
Maynard F. Speer wrote:Image
I have no idea what that chart means. I can only find it used on money changer blogs. The devil is in the details.
It was originally from John Rekenthaler of MorningStar - ranking funds from best to worst, then categorising them by investment style and cost
http://www.morningstar.co.uk/uk/news/12 ... stion.aspx

It should be no wonder fund fees turn out to be the major determinant of returns when averaged across the whole fund universe .. They're really the only constant

Passive funds are every bit as active, it's just they're the collective-active - the combined trading activity of fund managers, DIY investors, accidental market-timers, etc.
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Uncle Pennybags
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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Uncle Pennybags » Sun May 31, 2015 12:09 pm

Maynard F. Speer wrote:
Uncle Pennybags wrote:I have no idea what that chart means. I can only find it used on money changer blogs. The devil is in the details.
It was originally from John Rekenthaler of MorningStar - ranking funds from best to worst, then categorising them by investment style and cost
http://www.morningstar.co.uk/uk/news/12 ... stion.aspx
I notice John Rekenthaler is Morningstar's vice president of new product development. That chart he put together is arbitrary and capricious. Low cost asset allocation index investing does not make Morningstar's register ring.

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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Alchemist » Sun May 31, 2015 2:51 pm

I think there is a lot of loose use of definitions in this thread causing some confusion. The argument from Bogle and the Bogleheads has never been that every active fund loses, or even that every investor in an active fund loses after costs. The argument is that the AVERAGE or even majority of active fund and active fund investors lose to the Index especially after costs are taken into effect.

This means that there will be some winners, IIRC it is somewhere around 15%-20% of active funds outperform over varying time periods. The problem is not doubting their existence, the problem is finding them before they out perform as the distribution appears nearly random and previous performance more often than not is a poor predictor of future performance. Therefore you can either take a roll of the dice and have a 1/5 or 1/10 chance of out performing, or you can buy a low cost index fund with a 100% confidence level that you will at least not underperform.

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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by Maynard F. Speer » Sun May 31, 2015 11:41 pm

Alchemist wrote:This means that there will be some winners, IIRC it is somewhere around 15%-20% of active funds outperform over varying time periods. The problem is not doubting their existence, the problem is finding them before they out perform as the distribution appears nearly random and previous performance more often than not is a poor predictor of future performance. Therefore you can either take a roll of the dice and have a 1/5 or 1/10 chance of out performing, or you can buy a low cost index fund with a 100% confidence level that you will at least not underperform.
But then the question is: Is picking an active that's likely to outperform as simple as picking one with low fees? Vanguard's own funds and Morningstar's research might suggest so ..

Or go a step further and pick one with low fees, a high active share, and a reputable manager (who perhaps owns the company, as Bogle suggests), and hold long-term .. I don't see any great reason to stop using passive funds if you're happy with them, but I don't think there's any great alchemy in picking good funds
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: CNBC article - Low cost is just the first step in picking funds: Bogle

Post by anil686 » Mon Jun 01, 2015 5:44 am

Maynard F. Speer wrote:
Alchemist wrote:This means that there will be some winners, IIRC it is somewhere around 15%-20% of active funds outperform over varying time periods. The problem is not doubting their existence, the problem is finding them before they out perform as the distribution appears nearly random and previous performance more often than not is a poor predictor of future performance. Therefore you can either take a roll of the dice and have a 1/5 or 1/10 chance of out performing, or you can buy a low cost index fund with a 100% confidence level that you will at least not underperform.
But then the question is: Is picking an active that's likely to outperform as simple as picking one with low fees? Vanguard's own funds and Morningstar's research might suggest so ..

Or go a step further and pick one with low fees, a high active share, and a reputable manager (who perhaps owns the company, as Bogle suggests), and hold long-term .. I don't see any great reason to stop using passive funds if you're happy with them, but I don't think there's any great alchemy in picking good funds
I agree with this - and Mr. Bogle seemed to agree with this in Common Sense on Mutual Funds and Enough. In fact he chided more fund companies from offering low cost active options which would give them a much better chance of outperforming their benchmarks.

However, there are 2 points that should be made:
1) In a taxable account, the ST/LT cap gains drag on returns may swamp what ever outperformance you may have seen over time. In tax advantaged accounts, there are simply not that many low cost active offerings in most people's plans due to the lack of advertising/symbiotic relationships between high cost active funds and 401K/403b plans. Of course if this a Roth/traditional IRA - then low cost active funds may be selected.

2) Faith. When a low cost active fund outperforms - and it will at times - it is easy to rationalize based on an intelligent manager, an excellent/disciplined strategy, etc... However, when it underperforms - and it will - one can rationalize such things as, "the fund manager did not become unintelligent overnight," or "this is all part of their strategy" or "let's buy some more - it's on sale!" IMHO, this is the hardest part of active management. Staying the course despite fund manager changes (invariably will happen over 50 years), strategy changes (JoMoney pointed out the average market cap changes in various funds in comparison to the SP500 this w/e) during times when the fund underperforms. It has been shown that is when most investors bail on the actively managed funds and that is behavioral. Add that to a possibility of fund closures that may happen over an investment lifetime depending on how profitable the fund is to the fund company and that is a lot of uncertainty wrt holding the index.

JMO though...

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