Author Topic: Why does it look like all my mutual funds outperformed the S&P over 10 years?  (Read 4587 times)

NewStachian

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Everyone says you can't beat the market and mutual funds under perform over time, yet my funds aggregate return over 10 years shows up as higher than the S&P (9.5% yearly since 2003). The only thing I can think of is the S&P return number doesn't take into account dividend distributions where my funds are reinvesting dividends, so the number of shares creeps up over time. Is this the answer?

warfreak2

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Something's a bit off still, the annualised total return for the S&P500 (including dividends reinvested) over the last 11 years is 8.74%.

It could be that your mutual fund doesn't just invest in the S&P500... "mutual funds" don't underperform over time, Vanguard index funds are mutual funds - it's actively managed funds that tend to lose to index funds. Also, 11 years isn't a very long time to "overperform" in. But also the S&P500 isn't the only index.

You should ask them what it's invested in...

NewStachian

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I've kept an eye on what I'm invested in. I have a lot in international and small/mid cap which wouldn't track like the S&P. The thing is, the 9.5% also subtracts off any fees from the funds, some of which are 0.75%-1.0%, so they actually returned over 10%. I've been slowly shifting my money to ETF/index funds from managed funds, but I'm curious if it's worth it since my managed funds have done so well.

Caoineag

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You should only compare to the S&P 500, if that is what you are invested in. My small caps definitely outperform the S&P 500, but that is not what I should be comparing them to anyways because its a different group of stocks.

sheepstache

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But have your managed funds done well compared to comparable indexes?  Obviously there are some periods where the international markets do better than the domestic, that's why people usually diversify their allocation.

jp

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If you are invested in small and mid caps, you should be comparing to the small and mid cap indices, not the S&P 500. 

For example, the small cap index S&P 600, has returned nearly double what the S&P 500 has over 10 years.

https://www.google.com/finance?q=INDEXSP:SP600

If you have only slightly beat the S&P 500, your managed funds have not done well, they have done poorly.  You took more risk and the small caps are more volatile.  You happened to come out ahead, but you would have done much better in an index fund for small caps most likely (with the equivalent level of risk)

« Last Edit: June 06, 2014, 08:24:35 AM by jp »

hexdexorex

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Since 2008 the market has taken off. So small / risky stocks do better in that situation. My 401k has been in small caps since 2009 so out of luck it has done way better than average. But starting a few months ago I have begun the process of selling it and moving it to large cap indexes. It isnt because I think the market overall is overvalued...but small/mid caps PE is too high for my liking...there are some great S&P stocks and the S&P in general has a pretty fair valuation.

dude

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If you are invested in small and mid caps, you should be comparing to the small and mid cap indices, not the S&P 500. 

For example, the small cap index S&P 600, has returned nearly double what the S&P 500 has over 10 years.

https://www.google.com/finance?q=INDEXSP:SP600

If you have only slightly beat the S&P 500, your managed funds have not done well, they have done poorly.  You took more risk and the small caps are more volatile.  You happened to come out ahead, but you would have done much better in an index fund for small caps most likely (with the equivalent level of risk)

This.  In addition, are you factoring in administrative costs of your mutual fund when you consider the returns?  If you're making 9%, but paying 2% in fees, your return is 7%.

Luck12

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In addition to everyone's comments:  There are some same/similar category mutual funds that will beat the indices, but only a small % do and the question is how do you identify those a priori?  Less than 50/50 chance that a fund that beat its index the past 10 yrs will do so the following 10 yrs. 

blackomen

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What's the asset allocation of the fund?  100% SPY is only an appropriate  benchmark for 100% large cap equity allocation.

Sent from my HTCEVOV4G using Tapatalk


NewStachian

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My allocation has changed over time, but generally 40% large cap, 25% mid/small, 25% international, 10% bonds.

I guess my next question is: what's a good strategy for changing my mutual funds to index funds if I have over 100k in unrealized gains from those funds? All my new investments are going into low cost ETFs (IVV for large cap), but it doesn't seem like it's worth the tax hit to transfer the money over to the lower cost funds.

hexdexorex

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My allocation has changed over time, but generally 40% large cap, 25% mid/small, 25% international, 10% bonds.

I guess my next question is: what's a good strategy for changing my mutual funds to index funds if I have over 100k in unrealized gains from those funds? All my new investments are going into low cost ETFs (IVV for large cap), but it doesn't seem like it's worth the tax hit to transfer the money over to the lower cost funds.

Always a hard call. If you know you are going to be in a low tax state/bracket soon wait till than. If not just do it asap and keep as much of it as possible in a low fund (unless you are over 50 then you probably can just wait and pull it out as needed)

NewStachian

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Don't you pay $0 in long term capital gains if you are in the 15% marginal income tax bracket? I thought I could FIRE, go no income for a year, dip into that bracket and dump it all. Or is that not how it works?

taekvideo

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Don't you pay $0 in long term capital gains if you are in the 15% marginal income tax bracket? I thought I could FIRE, go no income for a year, dip into that bracket and dump it all. Or is that not how it works?

I believe the capital gains themselves are added to your normal income when figuring whether you're below the threshold.  At least according to this...
http://www.bankrate.com/finance/taxes/no-capital-gains-due-for-some-investors-2.aspx

Quote
For example, consider a married couple with $75,000 taxable income, with $65,000 of that from wages and $10,000 from capital gains. Although their total taxable income exceeds their $72,500 limit, they pay no tax on $7,500 of the capital gains. That's the amount by which the taxable threshold exceeds their income that's subject to ordinary tax rates. And the excess $2,500 in capital gains would be taxed at 15 percent, the regular capital gains rate for taxpayers in the 25 percent tax bracket.


so if you had $400k in unrealized gains (for a married couple with 2 children), it would  take 6 years to cash out tax-free (with no other regular income).
If you're single it would take twice as long.
« Last Edit: June 06, 2014, 12:04:30 PM by taekvideo »

dudebroguy

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Check out your funds on Morningstar; they're pretty good about showing them against appropriate benchmarks.

But if it looks like they outperformed the benchmark...maybe they just did. There doesn't have to be anything sinister going on.

dude

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Check out your funds on Morningstar; they're pretty good about showing them against appropriate benchmarks.

But if it looks like they outperformed the benchmark...maybe they just did. There doesn't have to be anything sinister going on.

True.  You just may have picked the 30% that do (occasionally).