Put it in an Index and forget about it
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
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?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.
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.
[quote=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. [/quote] Both of them?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?
Ice,
This should be like shootin fish in a barrel for you. You must be smiling right now.With your help I’m slowly working on sighting my scope.
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.thank god for va’s
[quote=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.[/quote] 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.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.
[quote=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? [/quote]
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?
[quote=snaggletooth][quote=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. [/quote] Both of them?[/quote]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.
[quote=chief123] [quote=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? [/quote]
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?[/quote]
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.
What you have constructed are beta-centric long-only portfolios w/ linear expected value functions experiencing systemic risk-- no wonder you’re down 40%+.
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.
[quote=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. [/quote] Ice, snap out of it...you know too much.[quote=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%+.[/quote]
That’s what I was thinking.
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?A fact that I am slowly coming to realize. There’s another thread that says what would you do differently. Still doing research on it but I am looking at possibly indexing more.
Great efficient market analogy, but I'm not following your assertion that the efforts of the money managers make indexing a valid strategy.
I believe their relative performace to the overall market speaks to the benefits of indexing, but I don't understand how their analyzing of securities strengthens the strategy of indexing. Isn't indexing all about not wasting time and money collecting, gathering, analyzing, etc.?This is why some "global allocation" funds do very well over time. They can go anywhere in the world, in any asset class, to find the best assets to buy. They're not trying to beat an index, they're not trying to outperform anything. No "relative return" benchmarks. They are just trying for positive total return, all the time. This is why I like funds like Blackrock Global, Ivy Asset, First Eagle Global, Capital Income Builder. Other than 2008, where everything lost money, these funds post superior long-term positive returns. You can't really benchmark them against anything, as their holdings constantly change.
I also find that DEEP value managers (think Mutual series - Mutual Discovery and Mutual Shares) tend to perform very well over the long term. It's tough to lose big when you're searching for deep value - even during growth cycles. This is one of the things I dislike about indexes - some indexes can't replicate all investement styles real well. But if you are a pure "style box" asset allocator, I think indexing is mostly the way to go (other than maybe sm. cap, emerging mkts, and international FI).
Its not that money managers cant outperfom the market it’s just they get to tied down with the amount of assets they hold, and have very little flexibility. I personally believe buying index funds that gives you the ability to pull the funds out of the market when it looks like it going to hit the fan or utilizing them with option hedging strategies is the way to go. The advantages of index funds a far superior to any money manager or mutual fund.
[quote=iceco1d]
Indexing is about not spending (wasting) money on something you get no additional value from. Whether that means paying a “fund manager” 1% or the resulting transaction costs in fund turnover (not that there isn’t some turnover in index funds, but way less than most actively managed funds).
Indexing assumes that securities of certain types have similar performance characteristics and volatility. Indexing also assumes that those securities will be fairly priced, due to the actions of market participants. Maybe they won't be priced fairly 100% of the time, and maybe they won't be perfectly priced...but they will priced very closely to perfect, an overwhelming majority of the time, leaving so little to be gained from active management, that it isn't worth the cost. In other words, perhaps an active manager, over 20 years, could exploit an average of 3 bps extra annual gain from his services...well, unless he can perform his services, and implement them, net of transaction costs, for less than 3 bps, he is actually taking value away from the portfolio, not adding it (and most managers charge way more than 3 bps..not even counting transaction costs). Here's what I mean by active managers enabling indexing as a strategy...If nobody is actually ANALYZING securities, how would we ever get to a "fair" or "equlibrium" price? We wouldn't. Buyers & sellers determine prices. We need a fairly large amount of buyers & sellers, each armed with a fairly large, highly accurate, pools of information, in order to achieve "fair pricing" of securities. Market participants would use this information to bid prices to their correct value. So, here you have millions of people looking at a security..say shares of Walmart. Then you have thousands and thousands of people expressing their informed opinion on how much a share of Walmart would be worth, by offering to buy or sell at a particular price. How do these people figure out how much they would be willing to pay/receive for a share? They use available information. Would you buy Walmart for $500/share? No. Why not? The available information doesn't support that share price. So, how can you "beat the market?" How can you exploit buying stock in companies like Walmart, or GM, or Citi? Well, you have to realize that shares are significantly underpriced. And you have to be one of the only ones to know. In other words, you have to have information that none of the other market participants have (why insider info is such a big deal), which enables you to decide the security is underpriced, and you have an opportunity to exploit that market inefficiency. Once "the market" gets ahold of that same information, that caused you to buy because you think Walmart is underpriced, they will buy too on that information...and hence, the opportunity will disappear. Same thing on the sell side. You could short for excess returns, if you knew at exactly what point a security became overvalued. How would you determine overvaluation? Well, you'd base that off of information. So is the rest of the market. You have to know something the rest of the market doesn't, in order to exploit it. So indexing revolves around this notion that in many cases, there are SO MANY particpants, with SO MUCH information, these opportunities to exploit market inefficiencies are rare, and small, and not worth the 50 bps or 100 bps "Management Fee" to a fund manager. Because these managers don't know enough "exclusive information" in order to consistently beat the market, by a wide enough margin, to overcome their fee. This is also why I say active management is worthless in some cases, and valuable in others. I f everyone on this forum was asked to manage a portfolio consisting of any (and ONLY) stocks found in the Russell 1000, and we would be paid 1/2% for our services each year. Out of our returns, we would pay transaction costs as well, just like the "real world." Over the course of 10 or 20 years, we would compare all of our returns to the performance of the Russell 1000 itself, with no management, and no costs (or at least, lower costs than our 1/2%), in excess of 99% of us would underperform the index. It's a fact. It's not an opinion. The research is out there validating that very statement. We could all go get our CFAs, MBAs in Finance - hell, a Ph.D in finance. I don't care what you do. Over that period of time, 99%+ of us, will underperform the index. We simply don't have enough information, to cherry pick stocks out of the Russell 1000, that will enable us to "beat the market." Too many other people have the same info, or even better info. Too many people are trading on the same info we have. There is no free lunch - we either need to discover something about those companies that nobody else knows, or we need to earn a fair, market return, on those stocks. Period. Now, change the security population to say....we can invest in any equity, from any sized company, based in the Middle East. To be honest, I'd be hard pressed to name you 5 companies that are even based in the Middle East - let alone know where to find information about them. There is a drastic difference in the amount of information we can obtain about those companies, versus the companies found in the Russell 1000. Therefore, the market participants can't make as good of decisions, or more accurately, more 'rational' decisions. So, what you'll have, is a less-efficient market. So now, what are the chances that we can discover some information, about these companies in the Middle East, that would enable us to beat the market, significantly enough, to outperform it? The odds of discovering information, that other people trading in that market, don't know? Well, if I have the scope of a company like Goldman, or Ivy, or Oppenheimer, or whoever, maybe...just maybe...I can pull out some extra return from an inefficient market segment like this, and justify my 1% fee. Sorry if that's jumbled, I'm rushing for an appointment soon.[/quote]I know one thing...Your clients would sh!t if they knew they were paying you to do all that typing.
[quote=iceco1d]
Well, I suppose I could always spend my free time doing something less time consuming…like say, running my own forum?
Just kidding. Honestly though...What I do with my free time is none of my clients business. Just like the car I drive. The religion I choose. How I raise my kids (if I had any). Or any of the other nonsense, people in this business worry about. [/quote]If you can get people to pay you to clear the snorkel, while watching midget porn, more power to you.
[quote=B24]
This is why some "global allocation" funds do very well over time. They can go anywhere in the world, in any asset class, to find the best assets to buy. They're not trying to beat an index, they're not trying to outperform anything. No "relative return" benchmarks. They are just trying for positive total return, all the time. This is why I like funds like Blackrock Global, Ivy Asset, First Eagle Global, Capital Income Builder. Other than 2008, where everything lost money, these funds post superior long-term positive returns. You can't really benchmark them against anything, as their holdings constantly change.
I also find that DEEP value managers (think Mutual series - Mutual Discovery and Mutual Shares) tend to perform very well over the long term. It's tough to lose big when you're searching for deep value - even during growth cycles. This is one of the things I dislike about indexes - some indexes can't replicate all investement styles real well. But if you are a pure "style box" asset allocator, I think indexing is mostly the way to go (other than maybe sm. cap, emerging mkts, and international FI).
[/quote]
And I suppose the Bengals would be a pretty decent football team if they could find a way to convince the NFL to stop keeping score.
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