Author Topic: Active vs. Index Funds: "Like Refusing to Believe in Magic"  (Read 1934 times)

Telecaster

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Active vs. Index Funds: "Like Refusing to Believe in Magic"
« on: March 21, 2018, 02:35:09 PM »
Yet another study shows that actively managed funds under perform their benchmarks.

...Stated differently, over the last 15 years from 2002 to 2017, only one in 13 large-cap managers, only one in 19 mid-cap managers, and one in 23 small-cap managers were able to outperform their benchmark index. So it is possible for some active fund managers to “beat the market” over various time horizons, although there’s no guarantee that they will continue to do so in the future. And the percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases above over the last 15 years; and they may not sustain that performance in the future. For many investors, the ability to invest in low-cost, passive, unmanaged index funds and outperform 92% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.

Here’s an analogy, perhaps it’s not perfect: Suppose you could be guaranteed to score in the 95th percentile on the LSAT, MCAT, GRE, or GMAT exam without studying for even one minute. Wouldn’t that be appealing to most people compared to the alternative of spending a lot of time studying and probably getting a lower score? If I can out-perform 95% of active managers with a Vanguard or Fidelity index fund for almost free (.04% expense ratio), that choice to me seems easy: go with index investing. As Bethany McLean wrote in Fortune “Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.”



http://www.aei.org/publication/more-evidence-that-its-very-hard-to-beat-the-market-over-time-95-of-financial-professionals-cant-do-it/

nereo

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #1 on: March 21, 2018, 03:18:38 PM »
I like the analogy.  I'm going to use it the next time this subject comes up...

stashgrower

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #2 on: March 24, 2018, 05:24:07 AM »
Good analogy!

DavidAnnArbor

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #3 on: March 24, 2018, 06:44:01 AM »
Great quote.

oldmannickels

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #4 on: March 24, 2018, 07:26:08 AM »
Maybe they should stop calling it the average return. Because so many people associate it with the 50% percentile, they think 50% of returns are better than the average.

Mr Mark

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #5 on: March 24, 2018, 10:29:41 PM »
Maybe they should stop calling it the average return. Because so many people associate it with the 50% percentile, they think 50% of returns are better than the average.

It can't be an accident - if I was in the big investment companies I'd be doing everything I could to get the press to constantly refer to index funds "only" getting average returns, pumping out stories of Warren Buffet and how he beat the market, encouraging stock picking (so my quants can trade against them), and generally making equity investment complex and scary for ordinary people and pension fund trustees so I can fund my lifestyle from their returns.

nereo

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Re: Active vs. Index Funds: "Like Refusing to Believe in Magic"
« Reply #6 on: March 25, 2018, 11:16:17 AM »
Maybe they should stop calling it the average return. Because so many people associate it with the 50% percentile, they think 50% of returns are better than the average.

It can't be an accident - if I was in the big investment companies I'd be doing everything I could to get the press to constantly refer to index funds "only" getting average returns, pumping out stories of Warren Buffet and how he beat the market, encouraging stock picking (so my quants can trade against them), and generally making equity investment complex and scary for ordinary people and pension fund trustees so I can fund my lifestyle from their returns.

There is absolutely an effort by the financial industry to disparage index investing and go-it-alone money management.
When I first started out I had funds invested through ML because that's what my parents had.  When I fired him and told him I was just going to invest in index funds since literally 100% of my savings at that point was in IRAs he went on and on about how I was "settling for average - which means mediocre - returns" and while his funds may not have alwyas beat the SP500 (they last 7 of the 9 years I held them) I was "opening myself up to significant beta-volatility and he used a stategy of mumbo-jumbo-whozits-and-alpha-gamma-diversitification-on-cyclical-sector (honestly I tuned out after that...)"

The entire industry has a vested interest in convincing people that managing your own money is too hard and too risky.  Much like there's an industry designed around tax-preperation.  For a select few this may be true, but for the vast majority of us sods--- it's not.