Author Topic: Concise Article Showing Benefits of Index vs. Manged Funds  (Read 1992 times)

Xlar

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Concise Article Showing Benefits of Index vs. Manged Funds
« on: February 26, 2017, 12:26:36 PM »
I had a brief chat with a group of friends yesterday about investing for retirement. We didn't have long so I wasn't able to bring up MMM or early retirement. I did get a chance to say that Index Funds where were it was at and bring up a few statistics that I remembered. Then one friend said that he's just setup an account with an adviser and he's excited because the adviser's claim to fame is that they only lost 10% during the 08 crash. (Obviously he didn't have anything specific.) I mentioned that even if he lost less that he should at least look and see how well the adviser's fund rebounded. I'd like to send the friend an article or the like that has some data showing why index funds are the way to go. I really like the jcolins stock series but I think it's too long for my friend to just casually read. Does any one have a suggestion on what to send?

I'm hoping that they will be receptive and then I can dive deeper with them on what is possible but I also am aware that being too excited will be a turn off.

Thanks in advance!

NorthernBlitz

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #1 on: February 26, 2017, 03:24:04 PM »
They aren't articles, but I think that the Canadian Couch Potato podcast has done a good job of promoting indexing and low cost investments.

There are only a few episodes, but I think that these two were very good and might help your case.

4. Charles Ellis and the Index Revolution (January 25, 2017)

3. A Hedge Fund Manager Comes Clean feat. Lars Kroijer (January 11, 2017)

http://canadiancouchpotato.com/podcast/

aspiringnomad

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #2 on: February 26, 2017, 04:39:50 PM »
Copy and send them the discussion of "The Bet" starting on page 21 of Warren Buffet's latest letter to BH shareholders. I'll assume they know of him and trust that if anyone knows what they're talking about with respect to investing, it's him:

http://www.berkshirehathaway.com/letters/2016ltr.pdf


COEE

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #3 on: February 26, 2017, 04:47:02 PM »
Copy and send them the discussion of "The Bet" starting on page 21 of Warren Buffet's latest letter to BH shareholders. I'll assume they know of him and trust that if anyone knows what they're talking about with respect to investing, it's him:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

I was going to suggest the exact same thing.  Only one active trader on the entire frickin' planet bet Mr. Buffett $0.5M.  That alone says a lot.  And he's losing - by a lot.

Indexer

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #4 on: February 26, 2017, 07:48:46 PM »
A very simple math equation normally works for me.

All active traders as a group = the market.   All active traders - 1% management fee < the market.



Quote
Then one friend said that he's just setup an account with an adviser and he's excited because the adviser's claim to fame is that they only lost 10% during the 08 crash.

I work in the industry and I find this is really concerning. I can't imagine a reputable advisor making that claim, even if it was true. For starters, every client shouldn't have the same portfolio. Sure, someone in a very conservative portfolio, like 80% bonds, might only be down 10%. However, a more aggressive client with a longer time frame should have a more aggressive portfolio, which was probably down much more. Rhetorical questions: were ALL of his clients down 10%, does he manage every account the exact same way regardless of client situation, are these statements about being down 10% in '08 statements that FINRA &/or the SEC would approve him using in an advertisement or speech, and will he guarantee that investors will never be down more than 10%?  I'm guessing the answers would be no, no, no, and no!

Even a 20s/80b portfolio of index funds was only down about 10% in '08. Source: https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT#tab=1a

More concerning, two of an advisor's main roles are determining risk tolerance and behavioral coaching. If an advisor sets the expectation they are a magician who can avoid downturns what is that client going to do in a real downturn? The client has zero education or expectations that they need to stay invested in a crash.

Now, if your friend invested in a single fund, like VASIX, and it was only down 10% your friend's statement makes sense. However, that doesn't sound like the situation.

(rant over)
« Last Edit: February 26, 2017, 07:50:57 PM by Indexer »

Heckler

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #5 on: February 26, 2017, 08:02:20 PM »
Copy and send them the discussion of "The Bet" starting on page 21 of Warren Buffet's latest letter to BH shareholders. I'll assume they know of him and trust that if anyone knows what they're talking about with respect to investing, it's him:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

Unfortunately supporting the friends uneducated point - two to three times the losses for indexing in a big crash! 

GreatLaker

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #6 on: February 26, 2017, 08:09:55 PM »
The Arithmetic of Active Management by William Sharpe does a good job of explaining it.
https://web.stanford.edu/~wfsharpe/art/active/active.htm

But someone that wants to believe in active management will always think their advisor is one of the few that can overcome the costs of active management and consistently beat the market.

aspiringnomad

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #7 on: February 26, 2017, 08:12:09 PM »
Copy and send them the discussion of "The Bet" starting on page 21 of Warren Buffet's latest letter to BH shareholders. I'll assume they know of him and trust that if anyone knows what they're talking about with respect to investing, it's him:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

Unfortunately supporting the friends uneducated point - two to three times the losses for indexing in a big crash!

The friend would have to have incredibly poor reading comprehension to pick the first row out of a nine-row table embedded within a five-page narrative to form their overall understanding of the matter, especially when both the embedded table and broader narrative completely contradict that point.

Xlar

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #8 on: February 27, 2017, 05:20:33 PM »
Copy and send them the discussion of "The Bet" starting on page 21 of Warren Buffet's latest letter to BH shareholders. I'll assume they know of him and trust that if anyone knows what they're talking about with respect to investing, it's him:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

I was going to suggest the exact same thing.  Only one active trader on the entire frickin' planet bet Mr. Buffett $0.5M.  That alone says a lot.  And he's losing - by a lot.

Excellent suggestion! I will send this to my friend and report back with the result. Thanks :)

Xlar

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #9 on: February 27, 2017, 05:23:41 PM »
A very simple math equation normally works for me.

All active traders as a group = the market.   All active traders - 1% management fee < the market.



Quote
Then one friend said that he's just setup an account with an adviser and he's excited because the adviser's claim to fame is that they only lost 10% during the 08 crash.

I work in the industry and I find this is really concerning. I can't imagine a reputable advisor making that claim, even if it was true. For starters, every client shouldn't have the same portfolio. Sure, someone in a very conservative portfolio, like 80% bonds, might only be down 10%. However, a more aggressive client with a longer time frame should have a more aggressive portfolio, which was probably down much more. Rhetorical questions: were ALL of his clients down 10%, does he manage every account the exact same way regardless of client situation, are these statements about being down 10% in '08 statements that FINRA &/or the SEC would approve him using in an advertisement or speech, and will he guarantee that investors will never be down more than 10%?  I'm guessing the answers would be no, no, no, and no!

Even a 20s/80b portfolio of index funds was only down about 10% in '08. Source: https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT#tab=1a

More concerning, two of an advisor's main roles are determining risk tolerance and behavioral coaching. If an advisor sets the expectation they are a magician who can avoid downturns what is that client going to do in a real downturn? The client has zero education or expectations that they need to stay invested in a crash.

Now, if your friend invested in a single fund, like VASIX, and it was only down 10% your friend's statement makes sense. However, that doesn't sound like the situation.

(rant over)

I like your summary. Warren Buffet makes the same point :)

I would be surprised if the adviser made any kind of concrete promise. I'm sure it was all generalizations and "salesman's puffery". If I can I will try to get some more info on this adviser and what kind of funds he is trying to get my friend into.

Xlar

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #10 on: February 27, 2017, 05:26:04 PM »
The Arithmetic of Active Management by William Sharpe does a good job of explaining it.
https://web.stanford.edu/~wfsharpe/art/active/active.htm

But someone that wants to believe in active management will always think their advisor is one of the few that can overcome the costs of active management and consistently beat the market.

This is very true. Everyone wants to think that they are special and figured out something that no one else has. Right up to the point that it doesn't work out in reality... (We'll hopefully, my wife had a small investment account from before we met and they always had a very good spin on why they weren't able to match the market so you do have to do some work to realize what is going on...)

Spork

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Re: Concise Article Showing Benefits of Index vs. Manged Funds
« Reply #11 on: February 27, 2017, 05:49:10 PM »
Scott Burns (originally from Dallas Morning News) used to write an annual article on Index vs Managed funds with good statistics year over year.  His take was generally "yes, there are manged funds that beat indexes, but it is extremely uncommon for them to beat them year after year."

Burns is the one that got us into index funds.  He's the guy that invented the term "couch potato investing."