Put it in an Index and forget about it

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Dec 15, 2008 9:00 pm

Guys,



You ever feel like the snake oil they sold us on active management is just that???



For all the leather clad binders, marbles floors, and wining and dining - I would have thought our active managers could have done a little bit better than they have.



DAMMIT - they were supposed to avoid the down 40% !



If I end up joining the ranks of the unemployed I'm moving my account to the

hated Van Guard.......





Sword

Dec 15, 2008 9:27 pm

Swordoftruth,

 
I have come to similar realizations regarding paying for active management. I would like to invite somebody to tell me why the following strategy sucks for an average investor with moderate - agressive risk tolerance and 10+ years to retirement investing in a retirement account:
 
-Invest in a diversified mix of indexes in asset classes including: Large-cap, mid-cap, small-cap, tips, intermediate bonds, short-term gov't bonds, international equity, real estate, commodities, and a little cash.
 
-Go heavier on the equities for higher risk tolerance, heavier on bonds for lower risk tolerance.
 
-Hold for the long run. In our case, coach clients to keep holding
 
Sure you can vary this up a little bit and throw an active manager or two in the asset classes that are less efficient, I guess what I am looking for is someone to punch holes in this theory or give me a better alternative. For those in the accumulation stage is this all there is to it?
Dec 15, 2008 9:29 pm

I have a very good client who is 90 percent in CDs because he told me this was coming and 10 percent in a 'conservative' mutual fund account that I talked him into that has lost 30 percent.
Nice guy. Doesn't rub my nose in it.



Dec 15, 2008 9:33 pm

Of course I also have a prospect who has lost 55 percent of his money in his 401k, or almost three quarters of a million.
He had most of his money in emerging markets.
He said he has low tolerance for risk.


Dec 15, 2008 9:52 pm
iceco1d:

you can't punch holes in it...you can say something like 'i just can't believe that these ivy league guys can't do better than the msci prime market index,' but that isn't 'punching holes' in it.  the reason you can't punch holes in it, is because the research and facts support indexing vs active management in many, many cases (a little more complex than your example above, but you get the point). 

 
ps - yes, my shift key is broken. 
 
Both of them?
Dec 15, 2008 9:58 pm

What about punching holes in the buy and hold, long-term approach? Some people call this laziness, is buy and hold laziness or is it the smart way to invest? Why?

Dec 15, 2008 10:30 pm

Ice,

 
This should be like shootin fish in a barrel for you.  You must be smiling right now.
 
Dec 15, 2008 10:40 pm

With your help I'm slowly working on sighting my scope. 

Dec 16, 2008 7:18 am

I can count the actively managed funds that have held up on a few fingers - First Eagle Global, Blackrock AA, Ivy AS (for a while). Bad year when I am happy a fund lost 25% of it's value. They seem to respond on up days so my hope is that their "upside capture" is high as well.


Thank you managed futures! I had to give a shout out.
Dec 16, 2008 8:32 am

thank god for va's

Dec 16, 2008 9:13 am
Gordon Gekko:

I can count the actively managed funds that have held up on a few fingers - First Eagle Global, Blackrock AA, Ivy AS (for a while). Bad year when I am happy a fund lost 25% of it's value. They seem to respond on up days so my hope is that their "upside capture" is high as well.


Thank you managed futures! I had to give a shout out.
 
Gordon, being that each of them are traditional value managers (though Ivy has more of a top-down/aggressive approach than the others), I think we will find them being able to buy the companies on their "list" that had previously been too expensive to buy.  In other words, they can clean house and load up on their "dream stocks".  I too use each of those funds, and look forward to some good years ahead.  One other that I am cautiously optimistic about is Mutual Discovery (Franklin Templeton).  Although they are holding tremendous cash right now, and will probably lag the recovery a bit, they should be an excellent long-term play.  Fantastic LT record.
 
Unfortunately, Evilliard is leaving First Eagle in March, and the bench seems pretty thin.
Dec 16, 2008 9:25 am

I think their bench with be ok, they still have the analysts that has been there through it all take notes from Eveillard(Abhay Deshpande). Two other funds have done well also are, American Independence Stock Fund(I shares) and Permanent Portfolio.

Dec 16, 2008 9:28 am
howie:

Swordoftruth,



I have come to similar realizations regarding paying for active management. I would like to invite somebody to tell me why the following strategy sucks for an average investor with moderate - agressive risk tolerance and 10+ years to retirement investing in a retirement account:



-Invest in a diversified mix of indexes in asset classes including: Large-cap, mid-cap, small-cap, tips, intermediate bonds, short-term gov't bonds, international equity, real estate, commodities, and a little cash.



-Go heavier on the equities for higher risk tolerance, heavier on bonds for lower risk tolerance.



-Hold for the long run. In our case, coach clients to keep holding



Sure you can vary this up a little bit and throw an active manager or two in the asset classes that are less efficient, I guess what I am looking for is someone to punch holes in this theory or give me a better alternative. For those in the accumulation stage is this all there is to it?





Let me give it a shot, you gave me some general indexes, what about specfically what etfs/funds are you using to get that mix?

Dec 16, 2008 9:35 am
snaggletooth:
iceco1d:

you can't punch holes in it...you can say something like 'i just can't believe that these ivy league guys can't do better than the msci prime market index,' but that isn't 'punching holes' in it.  the reason you can't punch holes in it, is because the research and facts support indexing vs active management in many, many cases (a little more complex than your example above, but you get the point). 

 
ps - yes, my shift key is broken. 
 
Both of them?



I like to punch holes in walls when my clients decide at the last minute that they don't know how to effectively move a book, so they decide to just "weather the storm"

I have alot of holes in my wall recently.

Dec 16, 2008 9:57 am
chief123:
howie:

Swordoftruth,



I have come to similar realizations regarding paying for active management. I would like to invite somebody to tell me why the following strategy sucks for an average investor with moderate - agressive risk tolerance and 10+ years to retirement investing in a retirement account:



-Invest in a diversified mix of indexes in asset classes including: Large-cap, mid-cap, small-cap, tips, intermediate bonds, short-term gov't bonds, international equity, real estate, commodities, and a little cash.



-Go heavier on the equities for higher risk tolerance, heavier on bonds for lower risk tolerance.



-Hold for the long run. In our case, coach clients to keep holding



Sure you can vary this up a little bit and throw an active manager or two in the asset classes that are less efficient, I guess what I am looking for is someone to punch holes in this theory or give me a better alternative. For those in the accumulation stage is this all there is to it?





Let me give it a shot, you gave me some general indexes, what about specfically what etfs/funds are you using to get that mix?







Ok PSVIX,HNSVX,BMCIX,CGMFX,ISISX,FEVIX,SGIIX,MALOX,MQIFX,PRPFX... For the real estate, private REITs do better than funds and etfs. Commodities,tips,government bonds I cheated and put them in one fund.

Dec 17, 2008 11:28 pm

What you have constructed are beta-centric long-only portfolios w/ linear expected value functions experiencing systemic risk-- no wonder you're down 40%+.

Dec 17, 2008 11:43 pm
MinimumVariance:

What you have constructed are beta-centric long-only portfolios w/ linear expected value functions experiencing systemic risk-- no wonder you're down 40%+.





Try saying that five times fast.



There is no way you are a client facing advisor. You've got to be a back-shop bean counter with other guys doing the talking. I'm not saying you're not correct (if I actually knew what the hell you just said), there is just no way you can say anything close to that to a client. Or maybe I'm missing something and you were just being sarcastic.

Dec 18, 2008 1:04 am
iceco1d:

He's not being sarcastic.  He is studying for the CFA I believe.  He is either working with very 'high end' clients, or the guy 'running money' on a team.

 
Beta-Centric = Basically putting together the portfolio based on the Betas of the securities in the portfolio, to get an anticipated amount of volatility, and a particular expected return.
 
Long-Only = Obvious.  Not shorting. 
 
Linear Expected Return = You are going long only, so you multiply the weighting of each security in the portfolio, by its expected return, and plot the point.  If you plot the universe of the possible weightings in the portfolio, you get a straight line (i.e. linear) that illustrates your possible function outcomes. 
 
Essentially, if you had 2 securities...1 with an expected return of 10%, and 1 with an E/R of 5%, and you have 50% of your portfolio in each.  What is the E/R of your portfolio?  7.5%.  What if you have 0% of of the 5% security, and 100% in the 10% security?  Your E/R is 10%.  Plot all the possibilities.  You get a line.  You get a line, because you are long only.
 
If you were using options, or going short in certain securities, you wouldn't necessarily end up with a line...you could end up with a parabolic shape, or an elipse (think about how graphs for straddles, strangles, collars, etc. might look).
 
Systemic Risk = market risk.  I'm not sure how he's suggesting you don't have exposure to this - at least to some degree.  Perhaps he's just expressing that since you are long-only, you will essentially be exposed to an exact % of market risk (assuming you've diversified away all non-systemic risk).
 
That's my .02. 
 
 
Ice, snap out of it...you know too much.
Dec 18, 2008 8:05 am
MinimumVariance:

What you have constructed are beta-centric long-only portfolios w/ linear expected value functions experiencing systemic risk-- no wonder you're down 40%+.



That's what I was thinking.

Dec 18, 2008 10:49 am

What amazes me is how complicated the field of finance is with all of its terminology, formulas, charts, graphs, etc., yet none of this gives anyone a real advantage; it's a fact that the majority of money managers underperform their respective indexes.

 
Why bother?