Larry Swedroe: 2018’s Active Vs. Index Scorecard

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Random Walker
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Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Random Walker » Wed Mar 13, 2019 8:22 am

https://www.etf.com/sections/index-inve ... -scorecard

Results are predictable to Bogleheads; active under performs in every asset class. Impressive how the frequency of active underperformance increases with length of look back period. Also active provided no benefit in the down market year of 2018. This data is all on a Pre tax basis. For active funds, where taxes are frequently the greatest cost, the after tax results would be much worse.

Dave

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by marcopolo » Wed Mar 13, 2019 8:33 am

Random Walker wrote:
Wed Mar 13, 2019 8:22 am
https://www.etf.com/sections/index-inve ... -scorecard

Results are predictable to Bogleheads; active under performs in every asset class. Impressive how the frequency of active underperformance increases with length of look back period. Also active provided no benefit in the down market year of 2018. This data is all on a Pre tax basis. For active funds, where taxes are frequently the greatest cost, the after tax results would be much worse.

Dave
As you say, not that surprising. thanks for sharing.

Which category in this report contains funds whose prospectus say they are "active", but Larry and others say really should be thought of as "passive"?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Taylor Larimore » Wed Mar 13, 2019 8:54 am

Bogleheads:

Anyone who reads these figures (from the most reliable source available (SPIVA), and still buys a managed fund, is not a rational person.

Thank you, Jack!

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

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Dottie57 » Wed Mar 13, 2019 9:16 am

Taylor Larimore wrote:
Wed Mar 13, 2019 8:54 am
Bogleheads:

Anyone who reads these figures (from the most reliable source available (SPIVA), and still buys a managed fund, is not a rational person.

Thank you, Jack!

Best wishes.
Taylor
Some have no choice in 401k. I do have an active Dodge and Cox bond fund at ER of .15. It has done well over the years I have owned shares.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Random Walker » Wed Mar 13, 2019 9:24 am

marcopolo wrote:
Wed Mar 13, 2019 8:33 am

Which category in this report contains funds whose prospectus say they are "active", but Larry and others say really should be thought of as "passive"?
Fair question. The most honest answer I can give you is “I don’t know”. The comparison is between indexes and active funds, not index funds and active funds. So we know the above mentioned passive funds are not in the index category. As you say, prospectuses may say active for legalistic purposes. Thus maybe those funds are included and maybe they are not.
The best way to compare passive funds that are not index funds to indexes would be to simply look at their after tax results. When one starts down this path, he quickly realizes that it is factor exposure that determines results. Thus what really matters is that a fund adhere to its factor mandate rather than win or lose over a given time period. Larry has written articles comparing Vanguard index fund, DFA, Bridgeway in different asset classes. The results are consistent with the performance of the factors over the relevant time periods and the relative factor exposures of the funds.

Dave

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Tony-S » Wed Mar 13, 2019 11:28 am

Taylor Larimore wrote:
Wed Mar 13, 2019 8:54 am
Anyone who reads these figures (from the most reliable source available (SPIVA), and still buys a managed fund, is not a rational person.
My T Rowe Price New Horizons and Blue Chip Growth funds have outperformed S&P 500 and Total Market index funds over the last 20+ years. I have no intention to change my holdings (although I do have Fidelity's Total Market in my current work plan). If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 12:33 pm

I'm never exactly sure who the target audience is for studies showing that the average active fund, charging the average active fee, tends to do very poorly vs. indexes. The person that actually buys an average active fund with an average active fee, would probably never read that article. And I would guess 95% of those that do that, have no idea their fund is average or worse, or that the fees being charged are average or worse. Or they do know, but have no choice but to buy them because they have no other options in their 401(k).

I begrudgingly admit I actually agree with Dave Ramsey that it's possible to find a good active fund (though I don't agree with his particular choices). My go-to example of a good choice for an active fund is Vanguard Wellesley (or Wellington for that matter). I don't intend to rehash a debate on that because it's been done so many times before here, but for it to just be implied that you're likely to do very poorly if you go active no matter what, is a gross strawman argument or implication. And I don't think Jack B. would have agreed with that either if someone selected one of the more proven, historical Vanguard actives.
Last edited by azanon on Wed Mar 13, 2019 12:44 pm, edited 1 time in total.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 12:43 pm

azanon wrote:
Wed Mar 13, 2019 12:33 pm
I'm never exactly sure who the target audience is for studies showing that the average active fund, charging the average active fee, tends to do very poorly vs. indexes. The person that actually buys an average active fund with an average active fee, would probably never read that article. And I would guess 95% of those that do that, have no idea their fund is average or worse, or that the fees being charged are average or worse. Or they do know, but have no choice but to buy them because they have no other options in their 401(k).
So true... sadly most of those buying the garbage high cost funds not only don’t know about they aren’t average - but even worse, they are being sold the loaded funds by a broker showing promotional material making them think they have the best fund!
(Unfortunately, I’ve had to explain this with several family members, and some close friends.)

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 12:52 pm

Thought I'd quickly add something I saw not long ago; A brief video where Tim Buckley (Vanguard CEO) answered a question from a viewer "what's in his portfolio". Going on memory, he didn't give a stock/bond ratio, but he did mention it was built by both passives for a low cost base, with an active or actives for a chance to outperform (all Vanguard funds/etfs).

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 1:15 pm

I was thinking about this just the other day. Can you imagine if it really were true that no one really had any idea how to add value by security selection in the stock or bond market - that every bit of it was a sham whether people realized it or not. I wonder if there are any major outfits today that have an internal opinion or unpublished believe that they realize or know that they're not actually adding any value at all, rather just collecting fees and hoping you don't notice.

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by marcopolo » Wed Mar 13, 2019 1:37 pm

azanon wrote:
Wed Mar 13, 2019 1:15 pm
I was thinking about this just the other day. Can you imagine if it really were true that no one really had any idea how to add value by security selection in the stock or bond market - that every bit of it was a sham whether people realized it or not. I wonder if there are any major outfits today that have an internal opinion or unpublished believe that they realize or know that they're not actually adding any value at all, rather just collecting fees and hoping you don't notice.

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?
I am not sure i understand your reasoning.

Sure some active managers will outperform, but that is just how random number generation works. How would you attribute that to some special skill or additional value the manger is adding?

I am sure very few set up shop just to collect assets knowing that they will under perform. I am sure they believe they have some special skills that will let them out perform. Despite all the evidence to the contrary, they continue to believe that.

I am sure most of the salesmen selling high-cost Variable Annuities inside tax-sheltered 403B accounts also believe they are providing value to their customers.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
-Upton Sinclair
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 1:41 pm

Tony-S wrote:
Wed Mar 13, 2019 11:28 am
Taylor Larimore wrote:
Wed Mar 13, 2019 8:54 am
Anyone who reads these figures (from the most reliable source available (SPIVA), and still buys a managed fund, is not a rational person.
My T Rowe Price New Horizons and Blue Chip Growth funds have outperformed S&P 500 and Total Market index funds over the last 20+ years. I have no intention to change my holdings (although I do have Fidelity's Total Market in my current work plan). If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
Image
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 1:45 pm

marcopolo wrote:
Wed Mar 13, 2019 1:37 pm
azanon wrote:
Wed Mar 13, 2019 1:15 pm
I was thinking about this just the other day. Can you imagine if it really were true that no one really had any idea how to add value by security selection in the stock or bond market - that every bit of it was a sham whether people realized it or not. I wonder if there are any major outfits today that have an internal opinion or unpublished believe that they realize or know that they're not actually adding any value at all, rather just collecting fees and hoping you don't notice.

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?
I am not sure i understand your reasoning.

Sure some active managers will outperform, but that is just how random number generation works. How would you attribute that to some special skill or additional value the manger is adding?

I am sure very few set up shop just to collect assets knowing that they will under perform. I am sure they believe they have some special skills that will let them out perform. Despite all the evidence to the contrary, they continue to believe that.

I am sure most of the salesmen selling high-cost Variable Annuities inside tax-sheltered 403B accounts also believe they are providing value to their customers.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
-Upton Sinclair
I wasn't using reasoning, because I wasn't taking any position there. I was simply saying wouldn't it be pretty incredible if it were really true that the thousands upon thousands of investment portfolio managers, analysts, etc. actually had no ability to add value.

Of course some active managers will outperform by randomness, but that wasn't what I was addressing. Do any outperform due to skill, is the REAL question. What's your answer?

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Tony-S » Wed Mar 13, 2019 1:46 pm

Vulcan wrote:
Wed Mar 13, 2019 1:41 pm
(snip irrelevant imge)
Your cartoon jab is completely wrong. Had I been in index funds for those 20 year instead of my TRP funds, I'd have about $80k less than what I do now. That's a fact.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by DB2 » Wed Mar 13, 2019 1:47 pm

Tony-S wrote:
Wed Mar 13, 2019 11:28 am
Taylor Larimore wrote:
Wed Mar 13, 2019 8:54 am
Anyone who reads these figures (from the most reliable source available (SPIVA), and still buys a managed fund, is not a rational person.
My T Rowe Price New Horizons and Blue Chip Growth funds have outperformed S&P 500 and Total Market index funds over the last 20+ years. I have no intention to change my holdings (although I do have Fidelity's Total Market in my current work plan). If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
Those have been very impressive funds.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 1:48 pm

Tony-S wrote:
Wed Mar 13, 2019 1:46 pm
Vulcan wrote:
Wed Mar 13, 2019 1:41 pm
(snip irrelevant imge)
Your cartoon jab is completely wrong. Had I been in index funds for those 20 year instead of my TRP funds, I'd have about $80k less than what I do now. That's a fact.
Randall Munroe is never wrong

https://www.explainxkcd.com/wiki/index. ... rship_Bias
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 1:51 pm

Vulcan wrote:
Wed Mar 13, 2019 1:48 pm
Tony-S wrote:
Wed Mar 13, 2019 1:46 pm
Vulcan wrote:
Wed Mar 13, 2019 1:41 pm
(snip irrelevant imge)
Your cartoon jab is completely wrong. Had I been in index funds for those 20 year instead of my TRP funds, I'd have about $80k less than what I do now. That's a fact.
Randall Munroe is never wrong

https://www.explainxkcd.com/wiki/index. ... rship_Bias
Incidentally, over the last 5 years S&P 500 returned 47% vs T. Rowe Price New Horizons Fund 16%
That is a threefold underperformance
They say you can't argue with results, but what kind of defeatist attitude is that? If you stick with it, you can argue with ANYTHING.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Tony-S » Wed Mar 13, 2019 2:12 pm

Vulcan wrote:
Wed Mar 13, 2019 1:51 pm
Incidentally, over the last 5 years S&P 500 returned 47% vs T. Rowe Price New Horizons Fund 16%
That is a threefold underperformance
I'm not getting into an argument with you about your cherry-picked data because I have better things to do. But you should double check your numbers because according to Portfolio Visualizer's backtest, in the last 5 years $10k in Vanguard's S&P 500 led to a final balance of $16,484 whereas New Horizons would have been $18,469.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 2:30 pm

Tony-S wrote:
Wed Mar 13, 2019 2:12 pm
Vulcan wrote:
Wed Mar 13, 2019 1:51 pm
Incidentally, over the last 5 years S&P 500 returned 47% vs T. Rowe Price New Horizons Fund 16%
That is a threefold underperformance
I'm not getting into a [redacted] with you about your cherry-picked data because I have better things to do. But you should double check your numbers because according to Portfolio Visualizer's backtest, in the last 5 years $10k in Vanguard's S&P 500 led to a final balance of $16,484 whereas New Horizons would have been $18,469.
I was relying on Google's charts.
Not sure what to make of PV data - perhaps PRNHX pays more in dividends.

Regardless, my main point was that you are confusing strategy and outcome (a common mistake).

Even if your particular lottery ticket happened to win, buying it was still a bad financial strategy, and holding it up as an example to follow is a textbook manifestation of survivorship bias.
Last edited by Vulcan on Wed Mar 13, 2019 2:38 pm, edited 2 times in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 2:31 pm

Vulcan wrote:
Wed Mar 13, 2019 2:30 pm
Tony-S wrote:
Wed Mar 13, 2019 2:12 pm
I'm not getting into a [redacted] with you about your cherry-picked data because I have better things to do. But you should double check your numbers
I see that you already edited your response. Good for you!
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by alpine_boglehead » Wed Mar 13, 2019 2:33 pm

It's a probabilistic certainty that the total of non-indexers will also earn the market return, less costs.

The market is the average, so half of active investors will do better than average, half will do worse than average. Deduct higher costs (yachts, trading, taxes, stupid active being exploited by smarter but uninvestible active like high frequency trading) than index funds, and the distribution shifts into the negative.

The only way actively managed mutual funds could beat the market is by outsmarting other investors that are not mutual funds. Indexers can't really be outsmarted in this way, so there's only institutional and retail investors left. And obviously those aren't exploitable enough for actively managed funds to beat the market at their expense.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 2:37 pm

Vukcan,
I was going to say the the same thing you did. The TRowe fund performance vs SPX over the last 5 years is missing the point. Short term results, especially ex post, are mostly worthless. Like you said, it should be about the process not the outcome. (Not to mean ignore outcomes, but only to challenge your process.)

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Tony-S » Wed Mar 13, 2019 2:43 pm

Vulcan wrote:
Wed Mar 13, 2019 2:30 pm
I was relying on Google's charts.
Not sure what to make of PV data - perhaps PRNHX pays more in dividends.
New Horizons doesn't pay dividends, only capital gains.
Regardless, my main point was that you are confusing strategy and outcome (a common mistake).
Even if your particular lottery ticket happened to win, buying it was still a bad financial strategy.
What makes you think I don't have a strategy? That same $10k over 20 years would have been $98,225 for New Horizons but only $32,274 for the S&P 500 index fund. Looks like I've won the lottery every year for 20 years.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Vulcan » Wed Mar 13, 2019 2:45 pm

Tony-S wrote:
Wed Mar 13, 2019 2:43 pm
Regardless, my main point was that you are confusing strategy and outcome (a common mistake).
Even if your particular lottery ticket happened to win, buying it was still a bad financial strategy.
What makes you think I don't have a strategy? That same $10k over 20 years would have been $98,225 for New Horizons but only $32,274 for the S&P 500 index fund. Looks like I've won the lottery every year for 20 years.
I am not saying you don't have a strategy. I am saying you have a bad strategy that happened to generate a good outcome for you. Congratulations!
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 2:54 pm

alpine_boglehead wrote:
Wed Mar 13, 2019 2:33 pm
It's a probabilistic certainty that the total of non-indexers will also earn the market return, less costs.

The market is the average, so half of active investors will do better than average, half will do worse than average. Deduct higher costs (yachts, trading, taxes, stupid active being exploited by smarter but uninvestible active like high frequency trading) than index funds, and the distribution shifts into the negative.

The only way actively managed mutual funds could beat the market is by outsmarting other investors that are not mutual funds. Indexers can't really be outsmarted in this way, so there's only institutional and retail investors left. And obviously those aren't exploitable enough for actively managed funds to beat the market at their expense.
Only disagreeing to have a little fun, but you are mistaking statistical estimations of a large universe, over time etc. with making claims with certainty. I get your point, but get annoyed when people repeat things only because they hear it over and over, thus it must be correct.

First line is true: the weighted average return of all market participants is the market return (ex costs).

There is no reason to believe, and no math that is going to show that 50% of participants will be above, and 50% below, the market return (or index fund, either way it doesn't change anything).

The last point I'm genuinely curious to hear the explanation why you dont think a mutual fund manager can beat the market, specifically - unless outsmarting non mutual fund managers? How can you even begin to gather data to support that?

Also, the reason the few truly skilled institutional active managers consistently post excess returns in small/inefficient markets is often precisely because of the % of the market that is retail players. So, why don't you think a mutual fund manager can outperform a retail investor?

Hope you like friendly debate, and if not, I apologize. The point I was try to make was the difference between making a statical statement about the entire market vs comments related to unique participants, or a subset of the universe you were attempting to define. Again, hope you dont mind me being bored and commenting on this

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by marcopolo » Wed Mar 13, 2019 3:23 pm

azanon wrote:
Wed Mar 13, 2019 1:45 pm
marcopolo wrote:
Wed Mar 13, 2019 1:37 pm
azanon wrote:
Wed Mar 13, 2019 1:15 pm
I was thinking about this just the other day. Can you imagine if it really were true that no one really had any idea how to add value by security selection in the stock or bond market - that every bit of it was a sham whether people realized it or not. I wonder if there are any major outfits today that have an internal opinion or unpublished believe that they realize or know that they're not actually adding any value at all, rather just collecting fees and hoping you don't notice.

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?
I am not sure i understand your reasoning.

Sure some active managers will outperform, but that is just how random number generation works. How would you attribute that to some special skill or additional value the manger is adding?

I am sure very few set up shop just to collect assets knowing that they will under perform. I am sure they believe they have some special skills that will let them out perform. Despite all the evidence to the contrary, they continue to believe that.

I am sure most of the salesmen selling high-cost Variable Annuities inside tax-sheltered 403B accounts also believe they are providing value to their customers.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
-Upton Sinclair
I wasn't using reasoning, because I wasn't taking any position there. I was simply saying wouldn't it be pretty incredible if it were really true that the thousands upon thousands of investment portfolio managers, analysts, etc. actually had no ability to add value.

Of course some active managers will outperform by randomness, but that wasn't what I was addressing. Do any outperform due to skill, is the REAL question. What's your answer?
My take is that there may be a vanishingly small number of active managers that provide value beyond what just a random distribution might provide, but there is no way to identify them ahead of time. An individual trying to pick such a manager when investing, hoping they will outperform in the future, is just as likely (may be more so) to pick one that will under perform.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by marcopolo » Wed Mar 13, 2019 3:25 pm

Tony-S wrote:
Wed Mar 13, 2019 1:46 pm
Vulcan wrote:
Wed Mar 13, 2019 1:41 pm
(snip irrelevant imge)
Your cartoon jab is completely wrong. Had I been in index funds for those 20 year instead of my TRP funds, I'd have about $80k less than what I do now. That's a fact.
I think you just made his point regarding survivorship bias.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 3:59 pm

marcopolo wrote:
Wed Mar 13, 2019 3:23 pm
azanon wrote:
Wed Mar 13, 2019 1:45 pm
marcopolo wrote:
Wed Mar 13, 2019 1:37 pm
azanon wrote:
Wed Mar 13, 2019 1:15 pm
I was thinking about this just the other day. Can you imagine if it really were true that no one really had any idea how to add value by security selection in the stock or bond market - that every bit of it was a sham whether people realized it or not. I wonder if there are any major outfits today that have an internal opinion or unpublished believe that they realize or know that they're not actually adding any value at all, rather just collecting fees and hoping you don't notice.

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?
I am not sure i understand your reasoning.

Sure some active managers will outperform, but that is just how random number generation works. How would you attribute that to some special skill or additional value the manger is adding?

I am sure very few set up shop just to collect assets knowing that they will under perform. I am sure they believe they have some special skills that will let them out perform. Despite all the evidence to the contrary, they continue to believe that.

I am sure most of the salesmen selling high-cost Variable Annuities inside tax-sheltered 403B accounts also believe they are providing value to their customers.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."
-Upton Sinclair
I wasn't using reasoning, because I wasn't taking any position there. I was simply saying wouldn't it be pretty incredible if it were really true that the thousands upon thousands of investment portfolio managers, analysts, etc. actually had no ability to add value.

Of course some active managers will outperform by randomness, but that wasn't what I was addressing. Do any outperform due to skill, is the REAL question. What's your answer?
My take is that there may be a vanishingly small number of active managers that provide value beyond what just a random distribution might provide, but there is no way to identify them ahead of time. An individual trying to pick such a manager when investing, hoping they will outperform in the future, is just as likely (may be more so) to pick one that will under perform.
Ok thanks. I completely agree with the assessment that there's a vanishingly small number left (as opposed to zero left). And yeah, of course, i know I couldn't identify outperformers ahead of time. I have to look in the past- 30+ years is good for me.

Even with skill, of course no one completely escapes probabilities. The choices are lock in average returns at near zero cost, or pay as little as a few more basis points, and upgrade from a trained monkey guaranteeing average (market) returns to an entire team of humans (Since i mentioned Wellesley earlier, I'm told they have several people making their selections, not just the 4 fund managers - those managers each have a staff on top of just themselves). So in a tax-advantaged account, Wellesley literally just has to beat the "trained monkey," where said train monkey is spotted a few bps lead.
Last edited by azanon on Wed Mar 13, 2019 4:02 pm, edited 1 time in total.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by prd1982 » Wed Mar 13, 2019 4:01 pm

I don't understand how one can compare active funds to indexes. I have several American Funds funds in my IRA. Most are blends of US stocks, non-US stocks and bonds. How does one compare them to the index funds in this article? Clearly the AF funds will beat/loose to an index depending on how the 3 underlying asset types are doing that measurement period. I use Morningstar's data to compare a blend of the 3 VG funds to my AF funds using the same ratio of US stocks, non-US stocks and bonds. I feel the results are pretty much a wash. I do feel that having an adviser has helped. Yes, I could now do without him. But at 72, having him is a good back stop to prevent me from making really bad decisions or being scammed as my mental abilities fail. And once I'm gone, my wife, who doesn't want to deal with this, will benefit from having him. I have recommended that she keep all the IRA money in American Funds. This should prevent the adviser from recommending a change that benefits him more than her (although I don't think he would try it). And I did not pay a front-end load for buying American Funds; I do pay the ongoing class A costs.

As I look at the comparison of my active funds to a VG 3-index portfolio, it is clear that the real difference is not active vs. passive, or stocks vs bond allocation. It is US vs. non-US stocks. I keep a healthy % in non-US because I remember the Japanese experience. But 100% US would sure have been better (so far).

Note that the previous only applies to my IRA. For my non-tax advantaged, I'm moving to indexes where I can because of the tax advantage. While one might question the value of active vs. passive for the best pre-tax gains, there is no doubt of the tax advantage of index funds.
Last edited by prd1982 on Wed Mar 13, 2019 5:35 pm, edited 1 time in total.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Wed Mar 13, 2019 4:24 pm

Yeah the few times I've scanned American Funds, they're fairly decent funds, and a few of them have pretty nice performance histories. One isn't likely to get harmed that much by a properly constructed American Funds portfolio, and of course since they're active, there's a chance for out performance. I was just reminded of some fairly positive comments that Bill Bernstein had for American Funds.

The main point I personally drop back to is that it never was Active vs. Index, it is high cost vs. low cost. High cost can be high fees, and it can be high turnover especially in taxable accounts, etc. So I think at least 75% of the issue is costs, and "active" just gets blamed for it, even though there are examples of active not costing that much.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 4:58 pm

prd1982 wrote:
Wed Mar 13, 2019 4:01 pm
I don't understand how one can compare active funds to indexes. I have several American Funds funds in my IRA. Most are blends of US stocks, non-US stocks and bonds. How does one compare them to the index funds in this article? Clearly the AF funds will beat/loose to an index depending on how the 3 underlying asset types are doing that measurement period. I use Morningstar's data to compare a blend of the 3 VG funds to my AF funds using the same ratio of US stocks, non-US stocks and bonds. I feel the results are pretty much a wash. I do feel that having an adviser has helped. Yes, I could now do without him. But at 72, having him is a good back stop to prevent me from making really bad decisions or being scammed as my mental abilities fail. And once I'm gone, my wife, who doesn't want to deal with this, will benefit from having him. I have recommended that she keep all the IRA money in American Funds. This should prevent the adviser from recommending a change that benefits him more than her (although I don't think he would try it). And I did not pay a load for buying American FUnds.

As I look at the comparison of my active funds to a VG 3-index portfolio, it is clear that the real difference is not active vs. passive, or stocks vs bond allocation. It is US vs. non-US stocks. I keep a healthy % in non-US because I remember the Japanese experience. But 100% US would sure have been better (so far).

Note that the previous only applies to my IRA. For my non-tax advantaged, I'm moving to indexes where I can because of the tax advantage. While one might question the value of active vs. passive for the best pre-tax gains, there is no doubt of the tax advantage of index funds.
American Funds are so diversified, I wouldn't worry about taking time to benchmark each one. Here is a simple, and in my mind optimal, approach.
1. What was you stock/bond % mix (advisor or your plan to begin)?
2. Let's assume your original plan was to replicate a portfolio of risk similar to that of a 60/40 stock-bond mix
3. Your Total portfolio (the aggregate of everything) should be compared to a blended benchmark of 60% MSCI AC World Index and 40% AGG Bonds

Side Note... Please say you are directing these AF investments on your own, or somehow otherwise have access to the no-load share class? As long as you aren't paying extra American Funds is actually a highly talented group of independent portfolio teams who manage pieces of the various funds. Charley Ellis (active investor skeptic himself) has been on their board or involved with them for many years.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by prd1982 » Wed Mar 13, 2019 5:42 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 4:58 pm

American Funds are so diversified, I wouldn't worry about taking time to benchmark each one. Here is a simple, and in my mind optimal, approach.
1. What was you stock/bond % mix (advisor or your plan to begin)?
2. Let's assume your original plan was to replicate a portfolio of risk similar to that of a 60/40 stock-bond mix
3. Your Total portfolio (the aggregate of everything) should be compared to a blended benchmark of 60% MSCI AC World Index and 40% AGG Bonds

Side Note... Please say you are directing these AF investments on your own, or somehow otherwise have access to the no-load share class? As long as you aren't paying extra American Funds is actually a highly talented group of independent portfolio teams who manage pieces of the various funds. Charley Ellis (active investor skeptic himself) has been on their board or involved with them for many years.
I have updated my original response to show that I did not pay a front-end load, but am paying the ongoing class A costs. I do use a blend of VG indexes as my comparison. It has the same % of US stocks, non-US stocks and bonds as my AF portfolio. It is important to differentiate between US and non-US stock returns.

But my real question is whether the score card analysis is correct given that a large percentage (most?) of active funds are a blend of asset types.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by CyclingDuo » Wed Mar 13, 2019 5:58 pm

Random Walker wrote:
Wed Mar 13, 2019 8:22 am
https://www.etf.com/sections/index-inve ... -scorecard

Results are predictable to Bogleheads; active under performs in every asset class. Impressive how the frequency of active underperformance increases with length of look back period. Also active provided no benefit in the down market year of 2018. This data is all on a Pre tax basis. For active funds, where taxes are frequently the greatest cost, the after tax results would be much worse.

Dave
Great stuff, as usual. :beer
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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 6:03 pm

prd1982 wrote:
Wed Mar 13, 2019 5:42 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 4:58 pm

American Funds are so diversified, I wouldn't worry about taking time to benchmark each one. Here is a simple, and in my mind optimal, approach.
1. What was you stock/bond % mix (advisor or your plan to begin)?
2. Let's assume your original plan was to replicate a portfolio of risk similar to that of a 60/40 stock-bond mix
3. Your Total portfolio (the aggregate of everything) should be compared to a blended benchmark of 60% MSCI AC World Index and 40% AGG Bonds

Side Note... Please say you are directing these AF investments on your own, or somehow otherwise have access to the no-load share class? As long as you aren't paying extra American Funds is actually a highly talented group of independent portfolio teams who manage pieces of the various funds. Charley Ellis (active investor skeptic himself) has been on their board or involved with them for many years.
I have updated my original response to show that I did not pay a front-end load, but am paying the ongoing class A costs. I do use a blend of VG indexes as my comparison. It has the same % of US stocks, non-US stocks and bonds as my AF portfolio. It is important to differentiate between US and non-US stock returns.

But my real question is whether the score card analysis is correct given that a large percentage (most?) of active funds are a blend of asset types.
First things first, can anyone on here help him with this whole A shares thing? I don't really know mutual funds. I want to say there are cheaper retirement shares that also don't have a 12b-1.

As for the benchmark, I think you are coming at this from a different perspective. The approach you are using is a bit more complex due to more moving parts, and is answering the question "are these funds better than some dynamic blend of passive indices"? In other words, you are essentially trying to isolate security selection with the current method.

However, I suggest that you either ignore that, or do that only as a secondary activity.

Your goal - the benchmark - should represent a risk proxy similar to some combination of stocks and high grade fixed income. IMPORTANTLY, this benchmark needed to be selected ahead of time (otherwise, what exactly was the plan). If it wasn't, then I'd make that selection now. This represents your risk tolerance, and also needs to provide enough expected returns to get the $ amount you ultimately want (some longer term goal to keep you on course).

Now, you just use this static benchmark, and use the passive global equity benchmark and the AGG. Don't change the %s of each unless you made an overhaul in risk/return profile (retirement plan). To the extent the benchmark has more/less US or international stocks - well that is part of the bet you are measuring. Remember you are measuring the decision to use active managers, so it's not just about stock selection but also active bets on various regional exposures.

To answer your specific question about the scorecard, I honestly don't know what that means. Are you asking if it gives a good indication of the underlying stock vs bond split? If so, you can aggregate the investment grade fixed income into the bucket that shares the same risks with the AGG index. If there is high yield credit (basically anything that's credit sensitive rather than interest rates sensitive) then that should actually be grouped with the stocks as it has more equity beta than perhaps assumed.

Hope that helps.

Someone help him with the A shares. Are those okay for him?

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Dialectical Investor » Wed Mar 13, 2019 7:43 pm

azanon wrote:
Wed Mar 13, 2019 1:15 pm

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?

(underline added)
Did Bogle really say that? I don't think that's true. If it was true, individuals and companies would create no value, no wealth, and we'd all just be trying to confiscate wealth from one another. Our economic system would be a zero-sum game.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 7:55 pm

Dialectical Investor wrote:
Wed Mar 13, 2019 7:43 pm
azanon wrote:
Wed Mar 13, 2019 1:15 pm

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?

(underline added)
Did Bogle really say that? I don't think that's true. If it was true, individuals and companies would create no value, no wealth, and we'd all just be trying to confiscate wealth from one another. Our economic system would be a zero-sum game.
Stock market average weighted return of all participants can be a zero-sum game without meaning the economic system is also zero sum. (Not that stock returns equal GDP, but he only said zero sum, not 0% return).

That said, Azanon, did you make up a quote to make a point? I'm kind of confused by what you were trying to say

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by Dialectical Investor » Wed Mar 13, 2019 8:04 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 7:55 pm

Stock market average weighted return of all participants can be a zero-sum game without meaning the economic system is also zero sum. (Not that stock returns equal GDP, but he only said zero sum, not 0% return).
I suppose it could be, theoretically, in some imagined land, but in any practical sense, I don't see it. Regardless, even if possible, the quote said "have to be."

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Wed Mar 13, 2019 8:12 pm

Dialectical Investor wrote:
Wed Mar 13, 2019 8:04 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 7:55 pm

Stock market average weighted return of all participants can be a zero-sum game without meaning the economic system is also zero sum. (Not that stock returns equal GDP, but he only said zero sum, not 0% return).
I suppose it could be, theoretically, in some imagined land, but in any practical sense, I don't see it. Regardless, even if possible, the quote said "have to be."
Sorry, he crossed me up!

The average weighted alpha or excess return of all market participants is zero (ex any cost frictions).

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"The Arithmetic of Active Management"

Post by Taylor Larimore » Wed Mar 13, 2019 9:08 pm

Bogleheads:

Nobel Laureate, William F. Sharpe, was the first to convince me that low-cost index funds are the way to go:

The Arithmetic of Active Management

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

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Thu Mar 14, 2019 7:37 am

Dialectical Investor wrote:
Wed Mar 13, 2019 7:43 pm
azanon wrote:
Wed Mar 13, 2019 1:15 pm

Sure what Bogle often said is true, that the sum total of all returns have to be 0 minus any fees, and I get that, but for one to go on and propose that it's even worse than that; That no matter how knowledgeable you are, or how many tools you have at your disposal, that it is all pure randomness and no one can add any value whether they realize it or not. That would be something else, wouldn't it?

(underline added)
Did Bogle really say that? I don't think that's true. If it was true, individuals and companies would create no value, no wealth, and we'd all just be trying to confiscate wealth from one another. Our economic system would be a zero-sum game.
You might be the only person that didn't realize I misspoke, given the obvious mistake. The some total of net alpha (paraphrase, I forget his exact words).....

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Thu Mar 14, 2019 7:42 am

BJJ_GUY wrote:
Wed Mar 13, 2019 8:12 pm
Dialectical Investor wrote:
Wed Mar 13, 2019 8:04 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 7:55 pm

Stock market average weighted return of all participants can be a zero-sum game without meaning the economic system is also zero sum. (Not that stock returns equal GDP, but he only said zero sum, not 0% return).
I suppose it could be, theoretically, in some imagined land, but in any practical sense, I don't see it. Regardless, even if possible, the quote said "have to be."
Sorry, he crossed me up! ........
Wow... ok. Make that 2. Sorry guys, lol. Yes, of course returns are positive. :oops: I stopped following the thread for the rest of the day after making that mistake, so didn't have time to catch it sooner.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by lassevirensghost » Thu Mar 14, 2019 8:55 am

Tony-S wrote:
Wed Mar 13, 2019 11:28 am


My T Rowe Price New Horizons and Blue Chip Growth funds have outperformed S&P 500 and Total Market index funds over the last 20+ years. I have no intention to change my holdings (although I do have Fidelity's Total Market in my current work plan). If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
TSM/S&P 500 are appropriate benchmarks for New Horizons?
100% VSMGX

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Thu Mar 14, 2019 9:11 am

lassevirensghost wrote:
Thu Mar 14, 2019 8:55 am
Tony-S wrote:
Wed Mar 13, 2019 11:28 am


My T Rowe Price New Horizons and Blue Chip Growth funds have outperformed S&P 500 and Total Market index funds over the last 20+ years. I have no intention to change my holdings (although I do have Fidelity's Total Market in my current work plan). If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
TSM/S&P 500 are appropriate benchmarks for New Horizons?
I'd say the 2500 Growth is the best for this fund... based on 2 minutes of research. I'd otherwise never heard of it, so I was curious to look it up

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Beating the Index

Post by Taylor Larimore » Thu Mar 14, 2019 11:54 am

Tony-S wrote:If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
Tony-S:

How do I find the 20% of funds IN ADVANCE that will beat the index year after year?

Thank you and best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Beating the Index

Post by whodidntante » Thu Mar 14, 2019 12:57 pm

Taylor Larimore wrote:
Thu Mar 14, 2019 11:54 am
Tony-S wrote:If 80% of funds fail to beat the index funds, that means 20% beat the index funds. The trick is to find those that do year after year. More complicated than indexing, for sure, but certainly do-able.
Tony-S:

How do I find the 20% of funds IN ADVANCE that will beat the index year after year?

Thank you and best wishes
Taylor
Dave Ramsey says it's easy. You just look at the past performance. If that is too complicated then you can hire someone who paid him for an endorsement and then they will look at the past performance.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by azanon » Thu Mar 14, 2019 1:06 pm

Jokes aside, let's clarify an Active doesn't have to outperform "year after year" (which I read to mean, every year) for it to outperform over a long period of time. In fact, it's important to point out (and Vanguard does this in their papers on Active investing) that if you're going to use an active strategy, you need to be prepared to possibly endure multiple years of under-performance. And if you can't do that, they would probably tell you that you're not a candidate for that style of investing then.

That gets into tracking error. If you think having to endure tracking error risk would cause you to not stay the course while using an active strategy, then for that reason alone someone should be 100% index.

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by alpine_boglehead » Fri Mar 15, 2019 1:20 am

BJJ_GUY wrote:
Wed Mar 13, 2019 2:54 pm
alpine_boglehead wrote:
Wed Mar 13, 2019 2:33 pm
It's a probabilistic certainty that the total of non-indexers will also earn the market return, less costs.

The market is the average, so half of active investors will do better than average, half will do worse than average. Deduct higher costs (yachts, trading, taxes, stupid active being exploited by smarter but uninvestible active like high frequency trading) than index funds, and the distribution shifts into the negative.

The only way actively managed mutual funds could beat the market is by outsmarting other investors that are not mutual funds. Indexers can't really be outsmarted in this way, so there's only institutional and retail investors left. And obviously those aren't exploitable enough for actively managed funds to beat the market at their expense.
Only disagreeing to have a little fun, but you are mistaking statistical estimations of a large universe, over time etc. with making claims with certainty. I get your point, but get annoyed when people repeat things only because they hear it over and over, thus it must be correct.

First line is true: the weighted average return of all market participants is the market return (ex costs).

There is no reason to believe, and no math that is going to show that 50% of participants will be above, and 50% below, the market return (or index fund, either way it doesn't change anything).

The last point I'm genuinely curious to hear the explanation why you dont think a mutual fund manager can beat the market, specifically - unless outsmarting non mutual fund managers? How can you even begin to gather data to support that?

Also, the reason the few truly skilled institutional active managers consistently post excess returns in small/inefficient markets is often precisely because of the % of the market that is retail players. So, why don't you think a mutual fund manager can outperform a retail investor?

Hope you like friendly debate, and if not, I apologize. The point I was try to make was the difference between making a statical statement about the entire market vs comments related to unique participants, or a subset of the universe you were attempting to define. Again, hope you dont mind me being bored and commenting on this
I like friendly debates, and yes you're right, that post was too populist and simplistic.

Yes, there will be mutual fund managers that consistently beat the market by outsmarting other participants (or by sheer luck, but we aren't interested in these in this debate I guess). But the argument I often read (and it sounds reasonable) is that picking those managers is as hard as picking the winning stocks themselves. And that when those managers amass assets, it becomes harder for them to keep outperfoming. And if there's really an exploitable strategy this unicorn manager uses, others will try to copy it, making it less effective. So to keep outperforming, you need adaptive strategies as well. There's certainly some very smart guys doing this, but as I said, good luck picking them.
So, why don't you think a mutual fund manager can outperform a retail investor?
That follows from the nobody-can-predict-the-future hypothesis. Insider information would change that, though.

In my limited understanding it would also follow from the efficient market hypothesis (all assets are somewhat correctly priced) that any subset of the market should have the same likeliness of outperforming. But of course there's a caveat - those who are keeping the market efficient will earn their share for doing so (i.e. buying underpriced assets or selling/shorting overpriced assets and reaping the rewards). If a mutual fund manager is capable of consistently doing this, they will outperform. But for investors to benefit from this, they also have to outperform after costs. And that seems to be hard.

Have you read the "Gotrocks parable" in John Bogle's "The little book of Common Sense Investing"? That really resounded with me as very intuitive why trying to beat the market is a fools errand for the aggregate of all market participants. Doesn't mean that for some individuals (like very talented mutual fund managers) it can make sense. Of course it's too simplistic as well, because part of the function of the market is to provide capital to companies, and pricing companies is the way of correctly allocating capital to companies (if they issue new stock). That imaginary "Gotrocks" family would also have to think hard about which companies to allocate capital to, that would incur some costs as well.

To wrap it up, for the average investor in my opinion it makes no sense to look for the winning stocks or the winning managers, because the odds are not good. Therefore, diversify, hold the market and enjoy. :sharebeer

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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by BJJ_GUY » Tue Mar 19, 2019 12:58 pm

alpine_boglehead wrote:
Fri Mar 15, 2019 1:20 am
BJJ_GUY wrote:
Wed Mar 13, 2019 2:54 pm
alpine_boglehead wrote:
Wed Mar 13, 2019 2:33 pm
It's a probabilistic certainty that the total of non-indexers will also earn the market return, less costs.

The market is the average, so half of active investors will do better than average, half will do worse than average. Deduct higher costs (yachts, trading, taxes, stupid active being exploited by smarter but uninvestible active like high frequency trading) than index funds, and the distribution shifts into the negative.

The only way actively managed mutual funds could beat the market is by outsmarting other investors that are not mutual funds. Indexers can't really be outsmarted in this way, so there's only institutional and retail investors left. And obviously those aren't exploitable enough for actively managed funds to beat the market at their expense.
Only disagreeing to have a little fun, but you are mistaking statistical estimations of a large universe, over time etc. with making claims with certainty. I get your point, but get annoyed when people repeat things only because they hear it over and over, thus it must be correct.

First line is true: the weighted average return of all market participants is the market return (ex costs).

There is no reason to believe, and no math that is going to show that 50% of participants will be above, and 50% below, the market return (or index fund, either way it doesn't change anything).

The last point I'm genuinely curious to hear the explanation why you dont think a mutual fund manager can beat the market, specifically - unless outsmarting non mutual fund managers? How can you even begin to gather data to support that?

Also, the reason the few truly skilled institutional active managers consistently post excess returns in small/inefficient markets is often precisely because of the % of the market that is retail players. So, why don't you think a mutual fund manager can outperform a retail investor?

Hope you like friendly debate, and if not, I apologize. The point I was try to make was the difference between making a statical statement about the entire market vs comments related to unique participants, or a subset of the universe you were attempting to define. Again, hope you dont mind me being bored and commenting on this
I like friendly debates, and yes you're right, that post was too populist and simplistic.

Yes, there will be mutual fund managers that consistently beat the market by outsmarting other participants (or by sheer luck, but we aren't interested in these in this debate I guess). But the argument I often read (and it sounds reasonable) is that picking those managers is as hard as picking the winning stocks themselves. And that when those managers amass assets, it becomes harder for them to keep outperfoming. And if there's really an exploitable strategy this unicorn manager uses, others will try to copy it, making it less effective. So to keep outperforming, you need adaptive strategies as well. There's certainly some very smart guys doing this, but as I said, good luck picking them.
So, why don't you think a mutual fund manager can outperform a retail investor?
That follows from the nobody-can-predict-the-future hypothesis. Insider information would change that, though.

In my limited understanding it would also follow from the efficient market hypothesis (all assets are somewhat correctly priced) that any subset of the market should have the same likeliness of outperforming. But of course there's a caveat - those who are keeping the market efficient will earn their share for doing so (i.e. buying underpriced assets or selling/shorting overpriced assets and reaping the rewards). If a mutual fund manager is capable of consistently doing this, they will outperform. But for investors to benefit from this, they also have to outperform after costs. And that seems to be hard.

Have you read the "Gotrocks parable" in John Bogle's "The little book of Common Sense Investing"? That really resounded with me as very intuitive why trying to beat the market is a fools errand for the aggregate of all market participants. Doesn't mean that for some individuals (like very talented mutual fund managers) it can make sense. Of course it's too simplistic as well, because part of the function of the market is to provide capital to companies, and pricing companies is the way of correctly allocating capital to companies (if they issue new stock). That imaginary "Gotrocks" family would also have to think hard about which companies to allocate capital to, that would incur some costs as well.

To wrap it up, for the average investor in my opinion it makes no sense to look for the winning stocks or the winning managers, because the odds are not good. Therefore, diversify, hold the market and enjoy. :sharebeer
I think we pretty much agree. My investments are almost entirely passive.

Two distinctions that define a difference of opinion, but only because I think we're defining things differently. My point about mutual fund managers outperforming the retail investor is specific to individuals (and stock brokers etc.) who are trying to pick stocks. Retail stock investors tend to make uneconomic buy/sell decisions, which provide inefficiencies, at least theoretically. Large cap US stocks may not be a good example, but China and India are examples of markets with vast numbers of public equities where retail drives vast % of volume, and a small % has any sell-side coverage at all. Active managers have the potential (not guarantee) to benefit from this.

Part two of the retail investor vs pros... but more broadly, the idea of a zero sum game. I'll begin by saying I agree with the general premise and takeaway. My only addition is that time horizon plays a big role in unique investor performance. A short term investor that makes money on stock ABC (buying and selling) hasn't necessarily taken away from the excess returns (from the same stock) reaped by a long term mutual fund manager with an entirely different end-point.

This is arguing only a nuance within a framework (that we agree on) which is mathematically inarguable. I'm only pointing out that there are a ton more ways fund managers might outperform over full market cycles. These odds go up if individual mutual fund investors rebalanced in a counter-cyclical fashion rather than chasing hot performance. Tons of studies already show the terrible difference between mutual fund stated returns versus individual's experienced returns.

Now, for the typical investor, or even someone spending a lot of time research mutual fund returns? I tend to agree with you that it's largely a losing game. Even if we could somehow completely eliminate all the behavioral bias hurdles, then we have significant randomness to overcome. To determine whether we found skilled managers or lucky fund returns, well, I guess we can come back here in 30 years when we have enough data to start making slightly better assumptions about that!

inbox788
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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by inbox788 » Tue Mar 19, 2019 2:16 pm

Interesting use of the word "control". I'm not sure if passive investors control anything, and that's an even deeper question for active investors.

Image

Passive investing now controls nearly half the US stock market
PUBLISHED AN HOUR AGO
https://www.cnbc.com/2019/03/19/passive ... arket.html

ADD: Someone started a thread on this article: viewtopic.php?f=10&t=276175

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alpine_boglehead
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Re: Larry Swedroe: 2018’s Active Vs. Index Scorecard

Post by alpine_boglehead » Sat Mar 23, 2019 1:14 pm

BJJ_GUY wrote:
Tue Mar 19, 2019 12:58 pm
To determine whether we found skilled managers or lucky fund returns, well, I guess we can come back here in 30 years when we have enough data to start making slightly better assumptions about that!
Yep, the bad luck for many retail investors is that they get their actively managed fund recommendations from marketing materials, and not from their own thorough research.

See you then in 30 years. In 2049, I'd expect the markets to look a bit different than today. Maybe we'll then have only index funds and the big AI pricing assets for a modest fee :twisted:

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