Author Topic: Significant losses over 4 years with a managed fund  (Read 3159 times)

Pixelshot

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Significant losses over 4 years with a managed fund
« on: March 20, 2018, 02:06:09 PM »
A few years ago I started an experiment on the advice of a friend. I signed up for a managed investment account with Personal Capital and dumped in a large amount. This is mainly 401k money from previous jobs years ago. I have not deposited any since then and it has been almost exactly 4 years. I also left a smaller chunk of money in a Vanguard Total Stock Market Index fund (VTSMX). I wanted to see if they differed significantly. Personal Capital (unsurprisingly) pledged that they can out perform the market (or at least come close) even taking into account the management fee (just under 1%). I have let them do their thing without any real guidance for 4 years.

This week, I looked back and did some calculations. If my math is correct, I have lost out on almost $37k by moving the cash to Personal Capital (versus keeping the funds in VTSMX).

Here are the calculations:

Account                     ->     Start amount     ->  Amount 4 years later    ->  % change total   ->    % change per year
Personal Capital          ->     $192,000.00         ->   $260,608.00                   ->    35.73%               ->    8.93%
Vanguard account       ->    $24,923.00           ->   $38,731.00                      ->    55.40%               ->   13.85%


Question 1 - How did my Vanguard account (entirely consisting of VTSMX shares) actually out perform the VTSMX share price during the same period? VTSMX price started at $47.43 and ended and $68.96 (a change of 45%). My account started at $24.9k and ended at $38.7k (change of 55%). Dividends?

Question 2 - Is my math correct or am I missing something? Seems like PC has been a big flop to the tune of a 10-20% loss (depending on how you calculate it - see Question 1).

Question 3 - should I dump Personal Capital and instead move all of the cash to the VTSMX fund? (I understand that there are some advantages to having a managed fund such as risk aversion, but they donít seem anywhere close to worth the cost).

It should be noted that PC has been very open and helpful and I perhaps could have taken better advantage of their services. On the other hand, I have been very skeptical since the beginning that the fees were worth it.

neo von retorch

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Re: Significant losses over 4 years with a managed fund
« Reply #1 on: March 20, 2018, 02:17:27 PM »
1: Roughly 2.5% per year for dividends seems about right.
2: Not surprising... assuming nearly 1% in fees, and human error in trying to beat the indexes.
3: Past performance is not indicative of future performance. But... your experiment pretty much informs you on how well professionals do when trying to beat the index. So where do you want your money invested?

appleshampooid

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Re: Significant losses over 4 years with a managed fund
« Reply #2 on: March 20, 2018, 02:21:33 PM »
As to the "HOW did they underperform this much" question, I would guess they were diversified into bonds at least a little bit, and a big chunk into international equity. International stocks have been going up, but as much as domestic over the past 4 years.

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #3 on: March 20, 2018, 02:22:33 PM »
this is why we say you should index even the pro's cant beat it.

you should have had them guarantee they'd beat it or cover the difference see if they are willing to take that chance - they wouldnt be.

appleshampooid

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Re: Significant losses over 4 years with a managed fund
« Reply #4 on: March 20, 2018, 02:29:35 PM »
this is why we say you should index even the pro's cant beat it.

you should have had them guarantee they'd beat it or cover the difference see if they are willing to take that chance - they wouldnt be.
If you compared their returns to a lazy 3-fund portfolio I bet it would be similar. Too lazy to run the numbers. So it may not be indexing vs. not indexing, but the specific asset allocations in play.

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #5 on: March 20, 2018, 02:32:29 PM »
this is why we say you should index even the pro's cant beat it.

you should have had them guarantee they'd beat it or cover the difference see if they are willing to take that chance - they wouldnt be.
If you compared their returns to a lazy 3-fund portfolio I bet it would be similar. Too lazy to run the numbers. So it may not be indexing vs. not indexing, but the specific asset allocations in play.

true - the 1% fee exists no matter what though you can bulid your own lazy 3 fund.

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #6 on: March 20, 2018, 02:41:22 PM »
seems like the consensus is that 1 - my math is roughly correct, and 2 - I should put my money back to VTSMX where it was.

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #7 on: March 20, 2018, 02:43:44 PM »
seems like the consensus is that 1 - my math is roughly correct, and 2 - I should put my money back to VTSMX where it was.

maybe - but you could also look at their AA and create something similar on your own at Vanguard.  Just b/c VTSAX beat VXUS the last four years doesnt mean it will the next 4... what you really should do is establish your AA and not play a 4 year game when one variable is unknown - even if it were known 4 years is too small a snapshot to know if one was superior or not.

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #8 on: March 20, 2018, 02:48:22 PM »
yes, I'm sure that's what the PC person will tell me. But I also know what I know: that the PC strategy was walloped for the last 4 years. There's no reason to believe the next 4 won't repeat the same pattern either. I feel like I gave it a good enough run to get an answer.

Mustache ride

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Re: Significant losses over 4 years with a managed fund
« Reply #9 on: March 20, 2018, 03:19:31 PM »
Do you know what PC put your money in? We've been in a bull market for a long time. 100% stocks is obviously going to be more favorable than anything more conservative (i.e. bonds). You are trying to compare the two, but it's most likely not apples to apples. All you know is how PC's allocation compared to yours over a very strong period of market performance. If another 2008 crash happened maybe PC would have been better because you were better protected.

100% equity is always going to give you bigger returns because you are taking more risk. The issue is you might be able to reduce your risk significantly while only giving up a fraction of return. I'm not saying PC is or isn't better, just stating that the two portfolios probably aren't comparable .

Radagast

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Re: Significant losses over 4 years with a managed fund
« Reply #10 on: March 20, 2018, 09:34:46 PM »
A few years ago I started an experiment on the advice of a friend. I signed up for a managed investment account with Personal Capital and dumped in a large amount. This is mainly 401k money from previous jobs years ago. I have not deposited any since then and it has been almost exactly 4 years. I also left a smaller chunk of money in a Vanguard Total Stock Market Index fund (VTSMX). I wanted to see if they differed significantly. Personal Capital (unsurprisingly) pledged that they can out perform the market (or at least come close) even taking into account the management fee (just under 1%). I have let them do their thing without any real guidance for 4 years.

This week, I looked back and did some calculations. If my math is correct, I have lost out on almost $37k by moving the cash to Personal Capital (versus keeping the funds in VTSMX).

Here are the calculations:

Account                     ->     Start amount     ->  Amount 4 years later    ->  % change total   ->    % change per year
Personal Capital          ->     $192,000.00         ->   $260,608.00                   ->    35.73%               ->    8.93%
Vanguard account       ->    $24,923.00           ->   $38,731.00                      ->    55.40%               ->   13.85%


Question 1 - How did my Vanguard account (entirely consisting of VTSMX shares) actually out perform the VTSMX share price during the same period? VTSMX price started at $47.43 and ended and $68.96 (a change of 45%). My account started at $24.9k and ended at $38.7k (change of 55%). Dividends?

Question 2 - Is my math correct or am I missing something? Seems like PC has been a big flop to the tune of a 10-20% loss (depending on how you calculate it - see Question 1).

Question 3 - should I dump Personal Capital and instead move all of the cash to the VTSMX fund? (I understand that there are some advantages to having a managed fund such as risk aversion, but they don’t seem anywhere close to worth the cost).

It should be noted that PC has been very open and helpful and I perhaps could have taken better advantage of their services. On the other hand, I have been very skeptical since the beginning that the fees were worth it.
1. Dividends.
2. Your math sucks. You just divided those numbers by 4 to get "% change per year". Did you at least get your data for identical start and end dates? Did you add any money at all in between?
3. I assume personal capital included international stocks and bonds, which with hindsight did not work out well. They might work out better in the future. You can't judge them for this.
4. A nearly 1% management fee presumably on top of fund expenses makes life difficult over the long run. Fees are a great reason to ditch them. Past performance is not necessarily. For example, did they also underperform the most similar Vanguard balanced funds?

In the end, all-in expenses >1% is not acceptable.
« Last Edit: March 20, 2018, 09:57:38 PM by Radagast »

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #11 on: March 21, 2018, 06:25:12 AM »
...
2. Your math sucks. You just divided those numbers by 4 to get "% change per year". Did you at least get your data for identical start and end dates? Did you add any money at all in between?
...

Radagast - This is an important one for me - I don't actually know if my math is correct, which is one of the main reasons to post here. Yes, I simply calculated the amount over time (same start and end dates) which was 4 years, minus one month. I'm not worried about being exact so I figure that dividing the change by 4 is fair. How should I have done it? Does that change the final calculation about total percent gain (which is in the end the most important number)?

Mainly, what I'm after is this: during the period in question, how much more $ would I have in my account had I simply left all of the money in VTSMX. (current calculation is about $37k)

Yes, I understand that there is a different risk involved in an all-stock approach (and yes, my PC allocation includes lower performing items), but I'm also considering MMM advice to use a "set and forget" approach (total market index) with very little management fees. 

I guess I could ask it this way also: is the 1% fee worth it for me? I could simply rebuild the AA I have currently using a Vanguard account and leave it (although most likely I'd just transfer everything to VTSMX). The difference is that, presumably, PC would make changes over time to adjust for market trends, world events, etc.  Thanks.
« Last Edit: March 21, 2018, 06:32:28 AM by Pixelshot »

neo von retorch

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Re: Significant losses over 4 years with a managed fund
« Reply #12 on: March 21, 2018, 06:49:32 AM »
...The difference is that, presumably, PC would make changes over time to adjust for market trends, world events, etc.  Thanks.

That's the actual problem! Always trying to chase what's happening. You can't consistently predict how financial instruments are going to move in response to events that are about to occur (which you also can't predict.) On a long enough timeline, basically everyone trying to move money around ends up doing worse than the indexes did. So, no, paying 1%/year is not worth it.
« Last Edit: March 21, 2018, 07:17:43 AM by neo von retorch »

BTDretire

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Re: Significant losses over 4 years with a managed fund
« Reply #13 on: March 21, 2018, 07:56:38 AM »
...
2. Your math sucks. You just divided those numbers by 4 to get "% change per year". Did you at least get your data for identical start and end dates? Did you add any money at all in between?
...

Radagast - This is an important one for me - I don't actually know if my math is correct, which is one of the main reasons to post here. Yes, I simply calculated the amount over time (same start and end dates) which was 4 years, minus one month. I'm not worried about being exact so I figure that dividing the change by 4 is fair. How should I have done it? Does that change the final calculation about total percent gain (which is in the end the most important number)?
I can point you in the right direction.
Find the growth for that first year-- I'm going to use an average for the four years 11.8%-- you could/should get exact numbers. And check mine!
1st year
$192,000 * 111.8% = $214,656 now multiply by 0.0175% for the dividend 1.0175 * $214,656 = 218,412
2nd year
$218,412 * 111.8% = $244,185 now multiply by 0.0175% for the dividend 1.0175 * $244,185 = $248,458
3rd year
$248,458 * 111.8% = $277,776 now multiply by 0.0175% for the dividend 1.0175 * $277,776 = $282,637
4th year
$282,637 * 111.8% = $315,988 now multiply by 0.0175% for the dividend 1.0175 * $277,776 = $321,518
 So the ending balance with the numbers I used is $321,518.
 However, I didn't use the actual individual gain for each year, I used the average, actual, will give a different ending balance.
 I also used 1.75% for the dividend, I think it was above that 4 years ago and it's below that now, I didn't use actual.
 Also dividends are not paid at the end of the year but at different times during the year, so it gets very complicated.
 You could look back and see in your VTSMX account when the dividends were paid and use that to do the calculation.
 Or you could just assume the portfolio that PC used for those 4 years cost you over $50,000. In another market scenario it might have went the other way.
  Think of all the retired folks that were 50% bonds during this run up, they may have lost much more, but there is a time in life when you are into preservation of assets, and do lose out on growth.
  I'm sure someone can point out what I missed, but I tried to show how I would do it.

PS. You have enough money to be in VTSAX, the same but with lower cost.

Cromacster

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Re: Significant losses over 4 years with a managed fund
« Reply #14 on: March 21, 2018, 08:10:44 AM »
PS. You have enough money to be in VTSAX, the same but with lower cost.

He most likely is.  Vanguard will automatically switch you when you cross the 10k mark.

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #15 on: March 21, 2018, 08:31:35 AM »
OP youre making the right decision in general but b/c of incorrect reasons -

1. dont pay PC 1% good reason
2. switching b/c it underperformed with out understanding how it was invested - bad reason

you really should go read JLcollins stock series.  Setup your own AA and learn about why your AA is what you choose it to be.

Car Jack

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Re: Significant losses over 4 years with a managed fund
« Reply #16 on: March 21, 2018, 08:52:08 AM »
I'd call up PC and say "You said you'd outperform Vanguard.  I want you to make good on that and at least match the % gain.  Where's my $37k?".

In reality, they'll be all "we have no guarantees".  Pull all your money out.  They are clowns.

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #17 on: March 21, 2018, 09:13:42 AM »
Thank you to all for your replies! I understand now that my calculations are a little off but not too bad (thanks BTDretire!), and that I'm essentially comparing apples to oranges. However, I think I have enough info to make my decision, which will be to move the cash back to Vanguard. I'll have to do some research to plan the proper AA. Your wisdom is very useful!

simonsez

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Re: Significant losses over 4 years with a managed fund
« Reply #18 on: March 21, 2018, 09:19:05 AM »
Sorry to sidetrack, if the timeline is 4 years, isn't the growth rate 7.94%?

(260608/192000)^(1/4)-1=0.0793731950...

Generally when dealing with time series, the geometric rate gives you what you want rather than the arithmetic one.  i.e. Multiplying your starting value of 192k time 1.0794 four times will give you the end value you had after ~4 years.  If you took the arithmetic % increase divided by 4 years, you would not get the same ending value.

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #19 on: March 21, 2018, 10:01:39 AM »
Sorry to sidetrack, if the timeline is 4 years, isn't the growth rate 7.94%?

(260608/192000)^(1/4)-1=0.0793731950...

Generally when dealing with time series, the geometric rate gives you what you want rather than the arithmetic one.  i.e. Multiplying your starting value of 192k time 1.0794 four times will give you the end value you had after ~4 years.  If you took the arithmetic % increase divided by 4 years, you would not get the same ending value.

Does that significantly change what the final amount would have been (had I left 192k in VTSMX)?

Telecaster

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Re: Significant losses over 4 years with a managed fund
« Reply #20 on: March 21, 2018, 10:38:57 AM »

Question 3 - should I dump Personal Capital and instead move all of the cash to the VTSMX fund? (I understand that there are some advantages to having a managed fund such as risk aversion, but they donít seem anywhere close to worth the cost).

They aren't worth the cost.  Personal Capital and other robo-advisors create a balanced portfolio based on some secret sauce, US stocks, international stocks, bonds, etc.  And yes, that can lower volatility.   But creating a good portfolio that beats the robo-advisors isn't very hard. 

For example, you could go 10% VBTLX,  70% VTSAX, and  say 20% VIMAX (mid-cap).  It covers all the based and the actual percentages really don't matter much.  The higher fees associated with Personal Capital create a big enough drag on the portfolio that a Personal Capital portfolio will never outperform. 

Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #21 on: March 21, 2018, 12:27:59 PM »
Thanks Telecaster. I think "go it alone" is where I'm headed. The fund manager called me for a long conversation. He was very kind, professional, and reasonable and gave very good feedback (once again, my issue is not with PC proper, just with the notion of paying someone $2k/year (give or take) to push a couple of buttons).

Here is a grossly paraphrased summary of our convo:

Manager: "sure, the mix we have for you was outperformed by the index fund, mainly because we've been in a bull market for 8 years and your allocation is tuned for the long term (20+ years) with bonds, etc. Had the market been different, then we would have significantly out performed the indexed fund. In the long run you'll be better off sticking with PC. And besides, bull markets eventually turn into bear markets, and when that happens you'll be winning again. Be cautious of market chasing"

Me: "if you're so good at that, couldn't you have been at least a little closer to the return I saw on my Vanguard money? I mean, you have seen the same markets I have, I don't expect day trading, but at least some aggressive management would help."

Manager: "not necessarily, it may have hurt. who's to know?"

Me: "so, what then am I getting for that 1% fee?"

Manager: "long term security and financial advice. And we can make up that 1% in other ways. Tax harvesting, etc.  If your car breaks, you go to a mechanic (e.g. we're pros)"

Me: "sure, but if it's a flat tire, I'd just change it myself. There's a reason I don't pay someone to clean my house, even if lots of other people do."

(then continue for 20 more minutes)

So, essentially I'm back where I started: Although his points are well taken and professionally delivered, I'm still not sure the fee is worth it. Particularly if I use a mix, as you're suggesting, which would cover most of the bases.

To be clear, I'm not expecting the managers to make me tons of extra cash, nor am I worried about the little bit of differences here or there.


« Last Edit: March 21, 2018, 12:29:40 PM by Pixelshot »

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #22 on: March 21, 2018, 01:03:17 PM »
dude

your problem is YOU DONT understand you're incorrectly comparing 2 returns b/c you dont actually understand investing or what you're doing

YOU NEED TO GO READ JLCOLLINS stock series - in the mean time you should pull all your money out and put it in VTSAX then once you understand things you can set your AA.

Based on everything you've said here its glaringly obvious you have a lack of knowledge and understanding of how ANY of this works ... and in reality if thats how you plan to stay you're probably safer with PC and paying them 1% b/c what would you do in a bear market.

go learn

NoStacheOhio

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Re: Significant losses over 4 years with a managed fund
« Reply #23 on: March 21, 2018, 01:08:03 PM »
dude

your problem is YOU DONT understand you're incorrectly comparing 2 returns b/c you dont actually understand investing or what you're doing

YOU NEED TO GO READ JLCOLLINS stock series - in the mean time you should pull all your money out and put it in VTSAX then once you understand things you can set your AA.

Based on everything you've said here its glaringly obvious you have a lack of knowledge and understanding of how ANY of this works ... and in reality if thats how you plan to stay you're probably safer with PC and paying them 1% b/c what would you do in a bear market.

go learn

This.

Also, you haven't lost any money. You've made substantial gains in both accounts.

You missed out on potential growth by choosing a more conservative allocation with higher fees at PC.

It's entirely possible we could've had a bad four-year stretch and the more conservative PC allocation would've ended up with better results (lower losses) even with the higher fees compared to 100% US equities.

In any case, you should be comparing PC to a self-managed portfolio with equivalent allocation. In that comparison, lower fees wins 100% of the time.

boarder42

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Re: Significant losses over 4 years with a managed fund
« Reply #24 on: March 21, 2018, 01:23:33 PM »
Here's the equivalent of what i could see you doing if you dont go learn and set an invesment plan

VXUS last 5 years 20.37% TOTAL ROI - this is the total stock market excluding the US - the opposite of VTSMX

VTI last 5 years 77% total ROI - this is the same as VTSMX

using your logic above you would be dumping everything into VTI b/c it won.  What you should do is go read learn and figure out your US to INT to Bond to small cap to mid cap to REIT to whatever else ratio(some of these could be 0 and putting it all into VTSMX isnt a bad conclusion neccessarily) you want to maintain and then determine based on tax efficiency which vehicle - Traditional/Roth/HSA/Taxable account is best for the asset you choose and then stick to it with an IPS - Investor Policy Statement. 

Telecaster

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Re: Significant losses over 4 years with a managed fund
« Reply #25 on: March 21, 2018, 01:49:29 PM »

So, essentially I'm back where I started: Although his points are well taken and professionally delivered, I'm still not sure the fee is worth it. Particularly if I use a mix, as you're suggesting, which would cover most of the bases.

To be clear, I'm not expecting the managers to make me tons of extra cash, nor am I worried about the little bit of differences here or there.

Look at it this way:  Your portfolio is roughly $300,000.   Let's say you invest with PC and pay a 1%, plus 0.5% fees on the underlying funds (because the ETFs themselves have fees).   Assuming 7% average year return (completely plausible), in 30 years your portfolio will be worth $1.4 million.

If you do the same thing with VTSAX, with a 0.04% fee, the same rate of return (again, 7% over that time is completely plausible), in 30 years your portfolio will be worth about $2.2 million.  An improvement of $800,000.   

That is one whole helluva lot of money Personal Capital will be making off you.  That means you will have to work substantially longer in order to retire, or you will have a substantially lower standard of living in retirement.  And the Personal Capital guy can buy a Porsche to park in his ski chalet in Aspen.  Can he provide any service to you that is worth that much money? 


Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #26 on: March 21, 2018, 02:51:54 PM »
Thx Telecaster and everyone else. Yes, I'm reading up and studying. No, I'm not an idiot, even if my substantial gaps in financial education are glaringly obvious (had not seen JLCollins till today so thank you for that excellent reference). Mainly I'm considering the value of the management fee and still have plenty to learn. I am now wiser for all of your advice. Much appreciated.
« Last Edit: March 21, 2018, 02:58:17 PM by Pixelshot »

uwp

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Re: Significant losses over 4 years with a managed fund
« Reply #27 on: March 21, 2018, 05:50:33 PM »
Why are you comparing the returns of VTSMX straight up to PC?

Do you have idea what they owned at PC?   Whatever it was, it performed in line with a (potentially) more reasonable comparison like Vanguard's 2035 Retirement Fund, which was up a touch over 36% the last 4 years.  Without knowing how the PC account was set up and allocated, this question is impossible to answer.

I picked the 2035 fund because the guy at PC mentioned a 20 year time frame.


Pixelshot

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Re: Significant losses over 4 years with a managed fund
« Reply #28 on: March 21, 2018, 09:24:03 PM »
Why are you comparing the returns of VTSMX straight up to PC?

Do you have idea what they owned at PC?   Whatever it was, it performed in line with a (potentially) more reasonable comparison like Vanguard's 2035 Retirement Fund, which was up a touch over 36% the last 4 years.  Without knowing how the PC account was set up and allocated, this question is impossible to answer.

I picked the 2035 fund because the guy at PC mentioned a 20 year time frame.

Yes, it was a mix similar to what you're referring to. They said it was their "third-most" aggressive strategy approach - a blend of stocks and bonds. So, yes it's comparing apples to oranges (PC vs Vanguard), which is very clear now. thx