Active v. passive during corrections
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Active v. passive during corrections
I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?
Re: Active v. passive during corrections
You can’t judge any fund on one day. How did it compare over 30 years?
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Re: Active v. passive during corrections
I have certainly looked at the much longer term and am happy there with what VG active management has done.
Not trying to judge, just observing that a VG active funds did twice as well as the passive funds in the face of a significant sell off.
While i am sure BHs are not doing anything except buying, the reality is most are probably watching for a floor to this correction.
It has been nine years since it really felt like it has the last week or so. So this is good time to remember all those lessons.
This benefit of active management may be one point lost in the constant focus on the (slightly) lower costs of passive funds.
Not trying to judge, just observing that a VG active funds did twice as well as the passive funds in the face of a significant sell off.
While i am sure BHs are not doing anything except buying, the reality is most are probably watching for a floor to this correction.
It has been nine years since it really felt like it has the last week or so. So this is good time to remember all those lessons.
This benefit of active management may be one point lost in the constant focus on the (slightly) lower costs of passive funds.
- sunnywindy
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Re: Active v. passive during corrections
No. Here are the cold hard facts: http://us.spindices.com/spiva/#/reports
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Re: Active v. passive during corrections
The answer is maybe.
I do believe that active management can bring value. I also think picking a good active manager is harder than picking individual stocks.
One day is a data point. 10 years of history does not mean it will preform well in the next downturn. You have to look at risk adjusted return as a combined function, not just risk or return individually. It is hard figure out what is due to luck, risk taking, and skill.
What you really want to do is look hard at the management team and the investment philosophy. Have they executed this well? What happens if the head portfolio leaves? etc. It is hard hard work.
I do believe that active management can bring value. I also think picking a good active manager is harder than picking individual stocks.
One day is a data point. 10 years of history does not mean it will preform well in the next downturn. You have to look at risk adjusted return as a combined function, not just risk or return individually. It is hard figure out what is due to luck, risk taking, and skill.
What you really want to do is look hard at the management team and the investment philosophy. Have they executed this well? What happens if the head portfolio leaves? etc. It is hard hard work.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Active v. passive during corrections
If I find an active fund that returned -6% yesterday, does that prove passive works better during corrections?
Re: Active v. passive during corrections
Yes.restingonmylaurels wrote: ↑Fri Feb 09, 2018 9:56 am I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?
Seriously?
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Re: Active v. passive during corrections
Sure, if one looks at the whole slew of fund companies. But if we narrow down the focus to VG funds only, it is different.sunnywindy wrote: ↑Fri Feb 09, 2018 10:18 am No. Here are the cold hard facts: http://us.spindices.com/spiva/#/reports
For example 10-year annualized return of active VGHAX is 11.79% and passive VFIAX is 9.77%, despite the active fund having a higher ER.
So, the universe of which I speak is only VG funds. Going from that premise, the ability of active funds to avoid taking the whole loss of the market during corrections, especially when it involves questionable investment activities like shorting volatility, seems attractive to me.
There has to be a reason such a large percentage of VG funds are actively managed. Here seems to be one nice benefit.
- sunnywindy
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Re: Active v. passive during corrections
Sure, there are always exceptions to the rule and there are on average about 20% of US funds that outperform their passive benchmarks over a 10 year period. But, how do you know which ones are going to outperform in the future? This is, of course, a rhetorical question because nobody can answer that, not even the fund managers. But, we do have evidence that broad-based indexes that track the market's up and downs (you can't separate the two), has an ~80% chance of outperforming active funds. The converse is that you have a 20% chance to outperform the passive fund. So, most people, when thinking they want a secure and mathematically higher percentage of making more money, will choose the passive fund.restingonmylaurels wrote: ↑Fri Feb 09, 2018 10:36 amSure, if one looks at the whole slew of fund companies. But if we narrow down the focus to VG funds only, it is different.sunnywindy wrote: ↑Fri Feb 09, 2018 10:18 am No. Here are the cold hard facts: http://us.spindices.com/spiva/#/reports
For example, 10-year annualized return of active VGHAX is 11.79% and passive VFIAX is 9.77%, despite the active fund having a higher ER.
So, the universe of which I speak is only VG funds. Going from that premise, the ability of active funds to avoid taking the whole loss of the market during corrections, especially when it involves questionable investment activities like shorting volatility, seems attractive to me.
There has to be a reason such a large percentage of VG funds are actively managed. Here seems to be one nice benefit.
Regarding your comparison, you can't compare an active sector fund (health care) to a broad-based index. It's fairer to compare it to other funds in its category. https://tinyurl.com/y7b3rlqo If you see it's 10 year total return performance, VGHAX made less money than the average of all the other funds in that category combined. If you click on "maximum", you will see that it outperformed. You can also add ticker "VHT" for the passive Vanguard Health Care ETF to see how it performed. If you click on different time periods, you will see it's very close (up or down) on it's active peer.
If you are looking for a fund that specifically tries to capture the returns on the upside but limits the returns on the downside, you should think about funds that target the low volatility or minimum volatility factor. Vanguard has a very good active global minimum volatility fund (VMVFX) and iShares has a whole suite of ETFs that follow an MSCI Minimum Volatility index. (I own iShares Min Vol EM - EEMV).
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- Phineas J. Whoopee
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Re: Active v. passive during corrections
What an individual fund does on any given day, week, or decade isn't important. What is important is the behavior of the portfolio as a whole.
My 100% stock index funds follow the market. My portfolio fluctuates less than they because I include a substantial portion of fixed income. I decide how much and in what form, consistent with my investing needs and wants.
PJW
My 100% stock index funds follow the market. My portfolio fluctuates less than they because I include a substantial portion of fixed income. I decide how much and in what form, consistent with my investing needs and wants.
PJW
Re: Active v. passive during corrections
restingonmylaurels,restingonmylaurels wrote: ↑Fri Feb 09, 2018 9:56 am I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?
My 61/39 portfolio drop around 2% too.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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Re: Active v. passive during corrections
This looks like a comparison of apples and oranges, not active and passive. Comparing a broad index to an individual sector.
Yes of course, some individual sectors will perform better than the broader market. And some will perform worse.
Unless you know daily and weekly which will do which, it is convenient to own the whole market. If you would rather tilt in some direction, have at it.
Yes of course, some individual sectors will perform better than the broader market. And some will perform worse.
Unless you know daily and weekly which will do which, it is convenient to own the whole market. If you would rather tilt in some direction, have at it.
Re: Active v. passive during corrections
Vanguard lists the turnover rate for VGHAX as 12.3%. They may be actively picking stocks, but I don't think they're doing a lot of buying and selling.
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Re: Active v. passive during corrections
restingonmylaurels,
Returns must not be compared without understanding the composition of each fund. A fund that invests in large cap value stocks, with a large dose of fixed income (the quintessential balanced fund) should drop less than "the market", for example.
Vanguard itself is not entirely sold on passive investment vehicles. It offers both products, and you can get very good active funds along with outstanding passive funds. By purely economic standards, Vanguard could offer two or three passive funds and everyone should be satisfied. But we are not entirely dispassionate and logical, so Vanguard offers a lot of other choices.
The key to investment happiness is to choose your asset allocation, and use mostly passive vehicles to achieve that ratio. Any active funds should be used sparingly, if at all. It is, to answer your initial query, entirely possible for an active fund to beat a passive fund during a market downturn. It is also entirely possible for an active fund to beat a passive fund during a market runup. The trick is to predict which one it will be.
Returns must not be compared without understanding the composition of each fund. A fund that invests in large cap value stocks, with a large dose of fixed income (the quintessential balanced fund) should drop less than "the market", for example.
Vanguard itself is not entirely sold on passive investment vehicles. It offers both products, and you can get very good active funds along with outstanding passive funds. By purely economic standards, Vanguard could offer two or three passive funds and everyone should be satisfied. But we are not entirely dispassionate and logical, so Vanguard offers a lot of other choices.
The key to investment happiness is to choose your asset allocation, and use mostly passive vehicles to achieve that ratio. Any active funds should be used sparingly, if at all. It is, to answer your initial query, entirely possible for an active fund to beat a passive fund during a market downturn. It is also entirely possible for an active fund to beat a passive fund during a market runup. The trick is to predict which one it will be.
Re: Active v. passive during corrections
What about all the complaints we're getting about Wellington and Wellesley suddenly underperforming the S&P500?restingonmylaurels wrote: ↑Fri Feb 09, 2018 9:56 am I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?
Re: Active v. passive during corrections
Wealthfront has been doing a great job of actively managing my portfolio, capturing tax losses during dips but keeping market gains as the market goes back up.
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Re: Active v. passive during corrections
I'm active - as in not selling many of my holds, but using SPY puts and trading SDS to make some money from the sell-offs.
Re: Active v. passive during corrections
Which active fund did you have? Vanguard has active funds covering all parts of the market, so in any market decline, some will outperform and some will underperform.restingonmylaurels wrote: ↑Fri Feb 09, 2018 9:56 am I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
I would expect that the average active fund loses 3.8% in a day that the markets lose 4%. However, this is not an advantage, but a reflection of the holdings of the funds; the average active fund holds 5% cash, while index funds stay 100% invested. You can get the same effect with index funds by holding 95% of your money in an index fund and 5% in cash.
Re: Active v. passive during corrections
I don't read anything into your experience. In my view, it just happened that way. In the short-term, it is very difficult to explain performance, much less come to a conclusion or make an endorsement based on said performance. Active managers can add value at any given time; the problem is that it is difficult for them to do so consistently.
Global stocks, US bonds, and time.
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Re: Active v. passive during corrections
I was thinking of putting my Roth IRA in a Vanguard active management stock fund and my wife's in total stock index and just see how it compares over 15-20 years. The balances are pretty close, but I haven't decided if I'm going to do it yet.
- willthrill81
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Re: Active v. passive during corrections
Research has shown that active funds tend to outperform passive funds during bear markets, due at least in part to their cash drag.
Over the long-term, passive funds have consistently generated higher returns.
If you knew that we were in the "dark days of investing," you would only be invested in 'safe' assets and not stocks at all.
Over the long-term, passive funds have consistently generated higher returns.
If you knew that we were in the "dark days of investing," you would only be invested in 'safe' assets and not stocks at all.
The Sensible Steward
Re: Active v. passive during corrections
It does not demonstrate any such thing.restingonmylaurels wrote: ↑Fri Feb 09, 2018 9:56 am I know this is a very small sample size (1 day), but ...
Yesterday the U.S. indices dropped around 4%. My actively managed pure U.S. large cap stock VG fund dropped around 2%.
Does this demonstrate that there can indeed be a real benefit to active management during the darker days of investing?