Larry Swedroe: Avoid High Ranked Funds

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Random Walker
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Larry Swedroe: Avoid High Ranked Funds

Post by Random Walker » Fri Dec 01, 2017 9:15 am

http://www.etf.com/sections/index-inves ... nopaging=1

Very Bogleheadish article. Even when I think I know exactly what one of Larry’s articles is going to say, I read it anyways. There’s always some new interesting information. In this article he demonstrates again that past performance of active funds has no predictive value. He also reminds us that facts are stubborn, and that human behavior is perhaps even more stubborn! I came into investing mostly with the view of nearly perfectly efficient markets, and over time I’m gaining increasing belief in some of the human behavioral drivers of returns.

Dave

birdog
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by birdog » Fri Dec 01, 2017 11:16 am

“Investors are ignoring the fact that even Morningstar has admitted its star ratings do not have predictive value, and that simply ranking by expenses has superior predictive value“

The above quote from the article pretty much sums it up for me.

Dead Man Walking
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by Dead Man Walking » Fri Dec 01, 2017 7:35 pm

Several Vanguard index funds currently have 4 star ratings at Morningstar. Should they be avoided?

DMW

swguy
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by swguy » Fri Dec 01, 2017 9:36 pm

Dead Man Walking wrote:
Fri Dec 01, 2017 7:35 pm
Several Vanguard index funds currently have 4 star ratings at Morningstar. Should they be avoided?
Seems like you may be missing the point. The point being made is that using Morningstar star ratings as a primary reason for selecting funds may be unwise. It's not saying "avoid buying higher ranked funds in favor of lower ones."

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cfs
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by cfs » Fri Dec 01, 2017 10:16 pm

Not looking good for the home team. Based on the star system I have an overall 3-Star Portfolio [counted all the stars and divided by the number of funds in my portfolio]. This will be fixed soon, as soon as I replace my Dumb Beta super stars with some Smart Beta zero stars. Wishing YOU and YOUR family a Merry Christmas, and thanks for reading.
~ Member of the Active Retired Force, portfolio withdrawal and spending rate 1.7% ~

Dead Man Walking
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by Dead Man Walking » Sat Dec 02, 2017 8:00 pm

swguy wrote:
Fri Dec 01, 2017 9:36 pm
Dead Man Walking wrote:
Fri Dec 01, 2017 7:35 pm
Several Vanguard index funds currently have 4 star ratings at Morningstar. Should they be avoided?
Seems like you may be missing the point. The point being made is that using Morningstar star ratings as a primary reason for selecting funds may be unwise. It's not saying "avoid buying higher ranked funds in favor of lower ones."
Are you saying that selecting a fund because of its star rating only applies to active funds? Vanguard index funds have been hyped by the media and have 4 star ratings. The argument made in this article has been made for 40+ years that I am aware of. Larry makes a great case, but his argument can be applied to the selection of any mutual fund - active or passive. I was just being fair and balanced.

DMW

venkman
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by venkman » Sun Dec 03, 2017 12:16 am

Dead Man Walking wrote:
Sat Dec 02, 2017 8:00 pm
Are you saying that selecting a fund because of its star rating only applies to active funds? Vanguard index funds have been hyped by the media and have 4 star ratings. The argument made in this article has been made for 40+ years that I am aware of. Larry makes a great case, but his argument can be applied to the selection of any mutual fund - active or passive. I was just being fair and balanced.
Star rankings for index funds are irrelevant, since the return of an index fund is guaranteed to be the index's return, minus expenses. Two index funds that track the same index and have similar expenses will always have essentially the same return.

magneto
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by magneto » Sun Dec 03, 2017 2:24 pm

"Point 1. a mutual fund’s past performance not only fails to guarantee its future performance (as the required SEC disclaimer states), but has almost no value whatsoever as a predictor—
Point 2. with the exception that poor performance, combined with high expenses, typically predicts future poor performance."

Would like to see the second point developed further. :?
Esp if those funds with high expenses are removed from the data set.

We have for some time run active closed-end funds alongside trackers.
Trackers much loved; but they don't always quite fit the specific needs for a particular asset type.

Sometimes the actives outperform, sometimes they underperform the trackers.
Mean reversion seems to frequent this area and quite often offers up rebalancing opportunities.
Criteria for selecting actives depend on :-
+ The assets to which exposure required
+ Philosophy of the fund versus that sought
+ The management team, not an individual star

Almost never base decisions on fund past performance, but Larry does raise an interesting point about serial underperformers which is worth some exploration.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

azanon
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by azanon » Sun Dec 03, 2017 3:43 pm

Morningstar found exactly the opposite as discussed here: http://news.morningstar.com/articlenet/ ... ?id=831740

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SeeMoe
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Re: Larry Swedroe: Avoid High Ranked Funds

Post by SeeMoe » Sun Dec 03, 2017 4:47 pm

Excellent article per human nature, bias and greed. Guess that I have been following Vanguard advice regards not chasing after past results and staying the course with a long term AA. Plus investing in good index funds. I was surprised only 15% of individual investors have (index funds)them! Also surprised how many of them chase past performance per their star power rating.

SeeMoe.. :shock:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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