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Post by johnsmith on Aug 17, 2022 12:57:56 GMT
Every time someone complains about how Passive Indexing is going to be the end of Capitalism, I want the interviewer to ask, "why have the returns of Active Funds been so shitty comparatively?"
They never do!
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Deleted
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Post by Deleted on Aug 17, 2022 13:24:55 GMT
I think we have covered some of the potential reasons before - fees, necessity to keep up with benchmarks. An example is MSFT. I have heard multiple managers say they don't think MSFT's price is justified given its earning potential. I am not agreeing or disagreeing with that. But they have to hold it because of its prominence in bench marks. For some, the law of large numbers comes into play.
Maybe passive is the be all to end all. Have all active managers flubbed? Seems somewhat general. I think indexes are excellent if you don't want to learn about the companies and they are the ultimate diversification. I have individual stocks, some passive etfs, and some funds.
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Post by Norbert on Aug 17, 2022 13:32:30 GMT
Every time someone complains about how Passive Indexing is going to be the end of Capitalism, I want the interviewer to ask, "why have the returns of Active Funds been so shitty comparatively?"
They never do!
Vanguard's active funds have outperformed their index benchmarks since inception. Active management works. (Sorry, I don't have the link to their paper handy, but it's available online.)
The problem is that there are many, many active funds that charge high fees, are incompetently managed, and/or just mirror the indexes. So, the stats appear to favor passive index investing, but that's misleading. If you invest with solid, fairly-priced companies like Vanguard, active management appears to offer an edge.
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Post by retiredat48 on Aug 17, 2022 13:56:28 GMT
Every time someone complains about how Passive Indexing is going to be the end of Capitalism, I want the interviewer to ask, "why have the returns of Active Funds been so shitty comparatively?"
They never do!
Vanguard's active funds have outperformed their index benchmarks since inception. Active management works. (Sorry, I don't have the link to their paper handy, but it's available online.)
The problem is that there are many, many active funds that charge high fees, are incompetently managed, and/or just mirror the indexes. So, the stats appear to favor passive index investing, but that's misleading. If you invest with solid, fairly-priced companies like Vanguard, active management appears to offer an edge.
+1...Guess that's why I own some Vanguard actively managed funds! BTW One can invest in both. Impose one rule on yourself: If your actively managed fund is ever lagging its index fund counterpart, switch into the index fund, for starters. Do not pay management fees for lagging performance.Also, I much prefer actively managed bond funds, over index ones. R48
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Post by johnsmith on Aug 17, 2022 14:05:22 GMT
I think we have covered some of the potential reasons before - fees, necessity to keep up with benchmarks. An example is MSFT. I have heard multiple managers say they don't think MSFT's price is justified given its earning potential. I am not agreeing or disagreeing with that. But they have to hold it because of its prominence in bench marks. For some, the law of large numbers comes into play. Maybe passive is the be all to end all. Have all active managers flubbed? Seems somewhat general. I think indexes are excellent if you don't want to learn about the companies and they are the ultimate diversification. I have individual stocks, some passive etfs, and some funds.
This isn't great reasoning. Needs more thought!
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Post by uncleharley on Aug 17, 2022 14:06:17 GMT
I actively manage my portfolio of largely passive funds. I supplement those passive funds with individual stocks. I'll stop now.
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hondo
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Post by hondo on Aug 17, 2022 14:12:18 GMT
Agree with R48, invest in both. Try to get the best of both worlds.
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Post by johnsmith on Aug 17, 2022 14:13:16 GMT
You are entirely correct. Vanguard Active's had/have been outperforming.
I believe it all came down to expense ratios. Most active funds, charge too much, so all the benefit of Active goes to the managers and not much flows down to the "investor" (more like chumps); I'd say this is even more true for Private Equity etc.
The best active fund would be: - We will only charge a fee when we outperform.
No outperformance, no fees!
In the late 90s + early 00s - hedge funds out performed significantly and IMO it was all due to insider trading, private information advantage. - Managers were giving hedge funds etc information ahead of time. - Hedge Funds were bribing (if I remember correctly) key people to get information ahead of time. - Outright fraud by analysts touting stocks in public while shitting on them in private.
That's why the SEC created rules that Management had to have those internet conference calls free to all. Management had to provide information to all at the same time.
Once all those rules came into place, hedge funds lost all their edge!
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Post by Deleted on Aug 17, 2022 14:21:09 GMT
I think we have covered some of the potential reasons before - fees, necessity to keep up with benchmarks. An example is MSFT. I have heard multiple managers say they don't think MSFT's price is justified given its earning potential. I am not agreeing or disagreeing with that. But they have to hold it because of its prominence in bench marks. For some, the law of large numbers comes into play. Maybe passive is the be all to end all. Have all active managers flubbed? Seems somewhat general. I think indexes are excellent if you don't want to learn about the companies and they are the ultimate diversification. I have individual stocks, some passive etfs, and some funds.
This isn't great reasoning. Needs more thought!
Really - I basically cited the same reasons Norbert did as why this is the case.
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Post by mozart522 on Aug 17, 2022 14:56:11 GMT
johnsmith, Norbert, retiredat48, That study was back when the Bogleheads were still on M*, ie pre-2008. Many indexes have been added since then, that cover some of the areas that active funds would drift into a bit. The next issue is the study was based on buy and hold. While some here might buy and hold indexes, few here buy and hold active funds. The next issue is that comparing individual funds discounts how well funds may work with each other in a portfolio. If I hold the three fund portfolio and you hold three active funds, two of which outperform but one of which doesn't by a lot, you could say active outperformed 66% of the time, but in reality, you had a lower portfolio TR. And if I have a three-fund index portfolio, how many will be satisfied with just 3 active funds? The bottom line is it is a nice theoretical discussion but one that is likely not provable on a portfolio level at least in the way most people invest. If anyone here has owned the same set of active funds with no changes for the last 20 years, they might be able to compare. Even R48 has sold some of the Wellington he has owned since he was 8 years old. You see, people just can't hold an active portfolio indefinitely
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Post by mozart522 on Aug 17, 2022 15:12:11 GMT
@slooow,
"indexes are excellent if you don't want to learn about the companies and they are the ultimate diversification."
So can active funds be if chosen well. The big difference is certainty vs uncertainty. With indexes, you will always get the market return minus a small fee. With active funds you are taking on risks that indexes don't have. In short, one is always betting against the market return. Often a good active fund may underperform its index counterpart for a couple of years and many investors then leave and look for other funds just about the time that active fund turns around and does well. The reason many like indexes is because the only unknown is what the market will do and for them, that is more than enough. Personally, I use both, and I'm not a true buy-and-holder.
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Post by johnsmith on Aug 17, 2022 15:24:27 GMT
This isn't great reasoning. Needs more thought!
Really - I basically cited the same reasons Norbert did as why this is the case. Your quotes
- "Have all active managers flubbed?" really ALL?
63% underperform - are you willing to take that 2 out of 3 chance that your active investment doesn't help you reach your investment goals?
- "Seems somewhat general." What were you expecting? It's about a large topic.
- "if you don't want to learn about the companies" How many people have time to follow the companies that they invest in properly? I have less than 10 individual stocks and I don't even read their annual reports (that's a 4 - 8 hour commitment to each company for just the annual report).
What are you going to learn about these companies that everybody doesn't know already? If you have enormous piles of time to "learn" - whatever that means, go for it. Most people already have busy lives with work, families, personal interests and a whole lot of other stuff going on.
Feel free to post more, make your thoughts meaningful, a value add to those who read it.
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Deleted
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Post by Deleted on Aug 17, 2022 15:42:41 GMT
Look at your question and give yourself the same advice as far as great reasoning -
"Every time someone complains about how Passive Indexing is going to be the end of Capitalism, I want the interviewer to ask, "why have the returns of Active Funds been so shitty comparatively?"
They never do!"
Did you do any kind of analysis on active fund management before making the very GENERAL statement you did? Seems to me you are saying all active funds here. Didn't see any qualifier.
If you don't learn about the companies you hold so you need to hold a passive fund - so be it. What does that have to do with reasoning as far as the question why active funds might underperform relative to passive. None. So why criticize it?
You pose a general thought - you get a general answer.
Again - my poorly reasoned response was fees, keeping up with benchmarks, and law of large numbers.
Now was your well thought out of value added question - why don't interviewers do their job? That is what the face of your question asks. I haven't seen an answer to that yet.
Good luck.
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Post by Deleted on Aug 17, 2022 15:52:43 GMT
@slooow , "indexes are excellent if you don't want to learn about the companies and they are the ultimate diversification." So can active funds be if chosen well. The big difference is certainty vs uncertainty. With indexes, you will always get the market return minus a small fee. With active funds you are taking on risks that indexes don't have. In short, one is always betting against the market return. Often a good active fund may underperform its index counterpart for a couple of years and many investors then leave and look for other funds just about the time that active fund turns around and does well. The reason many like indexes is because the only unknown is what the market will do and for them, that is more than enough. Personally, I use both, and I'm not a true buy-and-holder. Agree. I use both as well. I think your comments are dead on as far as how actives and indexes can affect holders and their actions. I sold FEMKX (emerging) and switched to the index. It is an area I am not overly familiar with.
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Post by johnsmith on Aug 17, 2022 16:04:11 GMT
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Post by retiredat48 on Aug 17, 2022 16:26:55 GMT
johnsmith , Norbert , retiredat48 , The bottom line is it is a nice theoretical discussion but one that is likely not provable on a portfolio level at least in the way most people invest. If anyone here has owned the same set of active funds with no changes for the last 20 years, they might be able to compare. Even R48 has sold some of the Wellington he has owned since he was 8 years old. You see, people just can't hold an active portfolio indefinitely But I have been reducing "balanced funds" for past decade...not because of active versus passive, but because of the fund structure. I desire separate stock and bond funds. And to your question re who has held active for last 20 years... I have. Held FSPTX since inception...started accumulating many decades ago...never sold any. I still have a foothold in VWELX because Vanguard tells me I (my spouse) am one of the oldest holders...69+ years. Maybe get a plaque someday...or an invite to Vanguard! I already have a priceless momento. On my wall is correspondence from Jack Bogle that reads: "Congratulations __________(R48)____ on retiring at age 48 using Vanguard philosophies and techniques." Signed: J. Bogle-------------------------------- R48
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Post by johnsmith on Aug 17, 2022 16:31:47 GMT
I posted earlier about how I thought most of the outperformance of Hedge Funds was due to Insider Trading etc. Came across this: bedrock.substack.com/p/all-time-best-interviews-with-accusedscroll to a youtube video Tom Hardin on CUNY TV Beyond the Bottom Line in 2018 "Tom Hardin was a hedge fund analyst in the early 2000’s. He got connected with the wrong people and started insider trading. Hardin notably paid off a Moody’s analyst with an envelope of cash. He was caught relatively early and agreed to cooperate with the US Department of Justice. In this interview, Hardin discusses how remarkably common insider trading was at the time and reflects on the pressures and opportunities facing an analyst. Hardin talks about how he rationalized the original trade around minute 6:55. Hardin’s naivete and straightforwardness make him a sympathetic character."
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Post by mozart522 on Aug 17, 2022 16:53:31 GMT
johnsmith , Norbert , retiredat48 , The bottom line is it is a nice theoretical discussion but one that is likely not provable on a portfolio level at least in the way most people invest. If anyone here has owned the same set of active funds with no changes for the last 20 years, they might be able to compare. Even R48 has sold some of the Wellington he has owned since he was 8 years old. You see, people just can't hold an active portfolio indefinitely But I have been reducing "balanced funds" for past decade...not because of active versus passive, but because of the fund structure. I desire separate stock and bond funds. And to your question re who has held active for last 20 years... I have. Held FSPTX since inception...started accumulating many decades ago...never sold any.I still have a foothold in VWELX because Vanguard tells me I (my spouse) am one of the oldest holders...69+ years. Maybe get a plaque someday...or an invite to Vanguard! I already have a priceless momento. On my wall is correspondence from Jack Bogle that reads: "Congratulations __________(R48)____ on retiring at age 48 using Vanguard philosophies and techniques. Signed: J. Bogle-------------------------------- R48 I said "The bottom line is it is a nice theoretical discussion but one that is likely not provable on a portfolio level at least in the way most people invest. If anyone here has owned the same set of active funds with no changes for the last 20 years..." I was talking about a 20 year active fund PORTFOLIO, not holding individual funds for that long.
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Post by retiredat48 on Aug 17, 2022 17:02:47 GMT
But I have been reducing "balanced funds" for past decade...not because of active versus passive, but because of the fund structure. I desire separate stock and bond funds. And to your question re who has held active for last 20 years... I have. Held FSPTX since inception...started accumulating many decades ago...never sold any.I still have a foothold in VWELX because Vanguard tells me I (my spouse) am one of the oldest holders...69+ years. Maybe get a plaque someday...or an invite to Vanguard! I already have a priceless momento. On my wall is correspondence from Jack Bogle that reads: "Congratulations __________(R48)____ on retiring at age 48 using Vanguard philosophies and techniques. Signed: J. Bogle-------------------------------- R48 I said "The bottom line is it is a nice theoretical discussion but one that is likely not provable on a portfolio level at least in the way most people invest. If anyone here has owned the same set of active funds with no changes for the last 20 years..." I was talking about a 20 year active fund PORTFOLIO, not holding individual funds for that long.Well, I think I qualify on that request also. I had an all active portfolio through the late sixties and seventies. Don't know exact date Bogle founded the first "passive" index fund, the S&P 500 one. But I was not enamored with it and felt it was a "sissy goal" to own. I likely went at least 20 years before any passive funds owned. Over the decades investors got more and more passive offerings, and I have owned some. I also became a supporter of the S&P500 as an index fund, for various reasons. But I never owned it. Go figure! R48
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Post by Mustang on Aug 17, 2022 21:14:24 GMT
I was talking about a 20 year active fund PORTFOLIO, not holding individual funds for that long. I have never owned anything but actively managed mutual funds from the early 80s to now. Over time I have changed the funds from 100% stock to around 60/40. I also combined and reduce them from probably 15 to 3. The three I have left are all 5-star funds beating their categories by 1-2 percentage points. As a buy and hold investor I look long term. Both of my moderate allocation funds have finished in the top quartile in seven of the last 10 years. The lowest annual raking for either one was 46 out of 750 funds. My conservative allocation fund was in the top quartile five of the last ten years.
Those three funds are consistent performers. It is unbelievable how many financial analysts recommend them. But they might not be the hottest short term fund. I don't se anything wrong with owning actively managed funds for 20 years or more. Just pick the long term performers.
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Post by mozart522 on Aug 18, 2022 13:42:44 GMT
I was talking about a 20 year active fund PORTFOLIO, not holding individual funds for that long. I have never owned anything but actively managed mutual funds from the early 80s to now. Over time I have changed the funds from 100% stock to around 60/40. I also combined and reduce them from probably 15 to 3. The three I have left are all 5-star funds beating their categories by 1-2 percentage points. As a buy and hold investor I look long term. Both of my moderate allocation funds have finished in the top quartile in seven of the last 10 years. The lowest annual raking for either one was 46 out of 750 funds. My conservative allocation fund was in the top quartile five of the last ten years.
Those three funds are consistent performers. It is unbelievable how many financial analysts recommend them. But they might not be the hottest short term fund. I don't se anything wrong with owning actively managed funds for 20 years or more. Just pick the long term performers.
I don't either. I was just pointing out that it is rare for anyone here to own a portfolio of active funds for 20 years.
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Post by saratoga on Aug 18, 2022 14:35:36 GMT
Mustang, Have you considered investing in PRWCX? You can purchase it if you invest 250K in T. Rowe Price funds.
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Post by bugman on Aug 18, 2022 15:46:11 GMT
Once interest rates stabilize (market as well) I'll invest a few chunks back into VWINX at PRWCX with the proviso that these will not be more than 10-15% each. Remainder will be indexes, CEF's and Preferred.
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Post by johnsmith on Aug 21, 2022 15:42:27 GMT
Every time someone complains about how Passive Indexing is going to be the end of Capitalism, I want the interviewer to ask, "why have the returns of Active Funds been so shitty comparatively?"
They never do!
Vanguard's active funds have outperformed their index benchmarks since inception. Active management works. (Sorry, I don't have the link to their paper handy, but it's available online.)
The problem is that there are many, many active funds that charge high fees, are incompetently managed, and/or just mirror the indexes. So, the stats appear to favor passive index investing, but that's misleading. If you invest with solid, fairly-priced companies like Vanguard, active management appears to offer an edge.
Like you said
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Post by Chahta on Aug 22, 2022 14:20:36 GMT
The answer is don't buy shitty active funds. Returns are very easy to find, mozart522 .
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Post by FD1000 on Aug 23, 2022 13:16:21 GMT
The answer is don't buy shitty active funds. Returns are very easy to find. mozart522 , Good point. I remember years of discussing arguing on the Bogleheads passive vs active. It's true that cheap indexes, especially the SP500, are a good choice, but it doesn't mean the only choice. I have posted about PRWCX for almost 15 years. Vanguard low ER funds beat their indexes. For many years, the SP500 lagged, it lost about 10% in 10 years, 2000-2009.
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Post by Chahta on Aug 23, 2022 13:47:54 GMT
I own 1 active fund for the purpose of taking CGs, in my taxable account. It does not give dividends and only occasional CG distributions. Very low turnover. Since I am in the 10-12% bracket until RMDs in 2 years, I get the CGs tax free.
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Post by mozart522 on Aug 23, 2022 15:29:48 GMT
The answer is don't buy shitty active funds. Returns are very easy to find, mozart522 . Paraphrasing old Will " Don't gamble; take all your savings and buy some good active funds and hold it till they go up, then sell them. If they don't go up, don't buy them. Sound about right, Chahta? Tell me, would don't buy shitty active funds advice you would give to your wife for when you are gone. Mine doesn't know a small cap from a baseball cap.
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Post by Chahta on Aug 23, 2022 15:34:19 GMT
Yup. Worked for VGSH didn't it?
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Post by mozart522 on Aug 23, 2022 15:40:01 GMT
Yup. Worked for VGSH didn't it? Meaning?
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