Author Topic: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market  (Read 12077 times)

FrugalFan

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So I've been reading a lot about index investing, and one of the common arguments against using Mutual Funds or Advisers is that 80-90% of them fail to beat the market (as shown by a number of studies). What I don't understand (and what my husband keeps pointing out to me) is shouldn't half of them or so beat the market by chance alone? Why is the performance so overwhelmingly poor? Is it because of the fees?

bennycx

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #1 on: May 17, 2015, 01:46:35 PM »
Yes exactly. Furthermore if the "market" returns 6% and typical fees could add up to 2% or more (management fees + performance fee over random hand-picked benchmark) you can imagine a huge chunk of returns go into paying manager fees.

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #2 on: May 17, 2015, 01:50:37 PM »
Yes, it's because of fees and transaction costs. When they buy and sell stocks they pay bid/ask spreads, brokerage fees, and if the purchases are large enough they cause the market price to temporarily increase because of their purchases (and conversely the market price to temporarily decline due to their selling). So if you just bought and hold the market, you would avoid all these costs. A lot of actively managed funds do a LOT of buying and selling, so they incur a lot of this cost. This cost is NOT reflected in the expense ratio for the fund--it's a hidden cost.

Another cost is holding cash. Managers who think they are really good at finding good companies hold on to a lot of cash in the fund, waiting for the right stocks to come along. This cash drag will underperform the index over time.

And, because they believe they are such good managers, active managers like to pay themselves a lot of money. So fees for actively managed funds are much, much higher than a passive index fund.

So if based on the stocks they hold, half the funds beat the index and half don't, and then you add in the transaction costs and fees, almost none of the funds beat the index. And essentially none of them beat it consistently (over long periods of time).

FrugalFan

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #3 on: May 17, 2015, 02:03:05 PM »
Thank you, forummm! I love all the detail you provided. Makes a lot of sense and had my husband convinced too.

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #4 on: May 17, 2015, 02:58:14 PM »
Glad to be of service <tip of the top hat>

Dodge

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #5 on: May 17, 2015, 04:34:25 PM »
For a nice visualization, I recommend watching video #6 - , from http://www.bogleheads.org/wiki/Video:Bogleheads®_investment_philosophy.


forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #6 on: May 17, 2015, 05:39:40 PM »
Yes, it's because of fees and transaction costs. When they buy and sell stocks they pay bid/ask spreads, brokerage fees, and if the purchases are large enough they cause the market price to temporarily increase because of their purchases (and conversely the market price to temporarily decline due to their selling). So if you just bought and hold the market, you would avoid all these costs. A lot of actively managed funds do a LOT of buying and selling, so they incur a lot of this cost. This cost is NOT reflected in the expense ratio for the fund--it's a hidden cost.

Another cost is holding cash. Managers who think they are really good at finding good companies hold on to a lot of cash in the fund, waiting for the right stocks to come along. This cash drag will underperform the index over time.

And, because they believe they are such good managers, active managers like to pay themselves a lot of money. So fees for actively managed funds are much, much higher than a passive index fund.

So if based on the stocks they hold, half the funds beat the index and half don't, and then you add in the transaction costs and fees, almost none of the funds beat the index. And essentially none of them beat it consistently (over long periods of time).

I should point out that the same is true for individual investors who buy individual stocks. They've done studies looking at people who have brokerage accounts. The people who traded the least (bought and held) very slightly outperformed the market. But as you went down the ranks of people who traded more and more, they underperformed the market by more and more.

Mighty-Dollar

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #7 on: May 17, 2015, 11:12:14 PM »
Don't buy actively managed mutual funds and don't buy individual stocks and bonds. Buy index funds like the total bond market index and the total stock market index, then rebalance. Over time you will outperform the pros. Unfortunately people go to brokers, insurance agents and other non-fiduciaries for money advice.

According to the White House Council of Economic Advisers, conflicts of interest shaves off on average 1 percent per year from retirement savings.

mathstache

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #8 on: May 18, 2015, 04:40:50 PM »
You are right in assuming that statistically some (not necessarily half) should beat the market. The ones who didn't beat the market aren't even around anymore. This makes it look like Advisors know what they are doing because only those who have done well, and new ones that haven't had a chance to fail yet, remain. This means that proportionally if you take a look at a snapshot in time more should look like they are doing well.

Indexer

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #9 on: May 18, 2015, 05:29:47 PM »
All investors = the market.
MINUS
trade fees
management fees
sales loads
12b-1 fees
capital gains taxes
dividend taxes
ordinary income taxes

All investors net of fees < market.  Normally they underperform by at least 1%.  When you add in taxes it gets much much worse.  So on average everyone is underperforming the market.  The question becomes 'by how much?'

What Vanguard does... I'm calling them out because not only do they use index funds but this is their general advice.... is try to keep fees and taxes as low as possible.  How do you beat Wall Street at their own game?  You stop playing their game, and make a new one.  When you change the game from 'beat the market by trading' to 'try to get as close to the market return as possible' your attention comes off of 'how are my stocks performing' to 'why am I paying so much to Wall Street and the IRS'?

The Vanguard total stock index, 500 index, total international stock index, etc.... aren't just low cost... they are also super tax efficient.  You are going to have a really hard time finding mutual funds more tax efficient than the 3 funds I mentioned. 

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #10 on: May 18, 2015, 06:07:59 PM »
The Vanguard total stock index, 500 index, total international stock index, etc.... aren't just low cost... they are also super tax efficient.  You are going to have a really hard time finding mutual funds more tax efficient than the 3 funds I mentioned. 

These funds, and many other Vanguard funds, have no capital gains distributions due to how Vanguard manages the funds to be tax efficient. It's a great service.

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #11 on: May 18, 2015, 08:54:35 PM »
The Vanguard total stock index, 500 index, total international stock index, etc.... aren't just low cost... they are also super tax efficient.  You are going to have a really hard time finding mutual funds more tax efficient than the 3 funds I mentioned. 

These funds, and many other Vanguard funds, have no capital gains distributions due to how Vanguard manages the funds to be tax efficient. It's a great service.

Vanguard actually has a patent on the method and if I remember correctly it doesn't expire until 2023.  Nice competitive advantage.  I'm not sure if it completely avoids CG distributions, especially in the first few years of implementation.

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #12 on: May 18, 2015, 10:05:41 PM »
However, I'll be the devil's advocate for a minute (I mostly buy index funds).  Here are three global ex-US funds, all benchmarked by the same index in Morningstar (MSCI ACWI Ex USA NR USD).  Two are index funds, one is actively managed.  The active fund has about 0.7% more ER.  Vanguard and Schwab are following different benchmarks though, FTSE vs MSCI, but that's all they have so I can't match that.

Vanguard FTSE All-Wld ex-US Idx Admiral  VFWAX, index fund, 0.14% net ER
Schwab International Index  SWISX, index fund, 0.19% net ER
Schwab International Core Equity Fund SICNX, actively managed, 0.86% net ER

The table below shows the funds' returns for 2010-14, 2015 YTD, and 5 yr (annualized and total) after fees.  As you can see, the actively managed fund is never the lowest performing fund for any of the 6 years shown and beats the two index funds over a 5 year period.  It's total 5 yr return is 21% higher than VFWAX and 11% higher than SWISX.

So, a low ER helps to obtain, but does not guarantee, a better return.

History (04/30/2015)  2010   2011     2012   2013   2014   YTD     5yr  ann  5yr  total
VFWAX11.85-14.2118.5214.49-4.05  9.32  8.29148.9
SWISX  6.61-11.7118.9321.64-5.74  9.3810.20162.5
SICNX10.51-12.1023.7323.95-4.4911.6212.48180.0

Note - I looked at VTIAX also.  It has very similar performance to VFWAX but does not have a 5yr return yet.

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #13 on: May 19, 2015, 09:29:11 AM »
However, I'll be the devil's advocate for a minute (I mostly buy index funds).  Here are three global ex-US funds, all benchmarked by the same index in Morningstar (MSCI ACWI Ex USA NR USD).  Two are index funds, one is actively managed.  The active fund has about 0.7% more ER.  Vanguard and Schwab are following different benchmarks though, FTSE vs MSCI, but that's all they have so I can't match that.

Vanguard FTSE All-Wld ex-US Idx Admiral  VFWAX, index fund, 0.14% net ER
Schwab International Index  SWISX, index fund, 0.19% net ER
Schwab International Core Equity Fund SICNX, actively managed, 0.86% net ER

The table below shows the funds' returns for 2010-14, 2015 YTD, and 5 yr (annualized and total) after fees.  As you can see, the actively managed fund is never the lowest performing fund for any of the 6 years shown and beats the two index funds over a 5 year period.  It's total 5 yr return is 21% higher than VFWAX and 11% higher than SWISX.

So, a low ER helps to obtain, but does not guarantee, a better return.

History (04/30/2015)  2010   2011     2012   2013   2014   YTD     5yr  ann  5yr  total
VFWAX11.85-14.2118.5214.49-4.05  9.32  8.29148.9
SWISX  6.61-11.7118.9321.64-5.74  9.3810.20162.5
SICNX10.51-12.1023.7323.95-4.4911.6212.48180.0

Note - I looked at VTIAX also.  It has very similar performance to VFWAX but does not have a 5yr return yet.

It's easy to cherry pick the funds that managed to outperform an index in hindsight. But many studies show that the same funds don't consistently outperform the index. Yes, there's no guarantee that a fund you pick at random will underperform the index for the next few years. But it's much more likely too.

Scandium

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #14 on: May 19, 2015, 10:51:30 AM »
I thought the 80-90% statistics was over a longer period of time? Half the managers will outperform (before fees) in any given year, but the same half won't necessarily outperform the next year. So over 10 years almost all of them will lag the index, even before fees.

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #15 on: May 19, 2015, 11:33:59 AM »
I thought the 80-90% statistics was over a longer period of time? Half the managers will outperform (before fees) in any given year, but the same half won't necessarily outperform the next year. So over 10 years almost all of them will lag the index, even before fees.

Yes, I think I saw one that was 10 years. Another study looked at the best performing funds from I think 2010, and within a few years, none of them were in the top performing funds for the years after that.

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #16 on: May 19, 2015, 10:55:06 PM »
Here is a ten year example, data is from my 401k quarterly report as of 3/31/2015.

Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index

Fund/Benchmark   YTD   2014   2013   2012   1yr     3yr     5yr     10yr     
FDGRX4.8914.5737.7618.6917.1117.4717.6612.21
S&P 5000.9513.6932.3916.0012.7316.1114.478.01

Growth Company beats the S&P 500 in every metric for 10 years.  Here is a comment from Morningstar, I can just get the beginning because I don't have paid subscription anymore.

Quote
Longtime manager Steve Wymer has led Fidelity Growth Company to a remarkable record during his tenure. The fund's 10% annualized gain since his 1997 start through November is among...

DavidAnnArbor

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #17 on: May 20, 2015, 06:11:18 AM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

MrMoogle

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #18 on: May 20, 2015, 06:49:08 AM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Yes, you should compare funds in the same classs.  Comparing a large cap index vs a small cap actively managed fund, and small cap should win (over the last 10 years).  But comparing small cap actively managed vs small cap index, and the index should outperform.  Just because small cap has had a better last 10 years. 

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #19 on: May 20, 2015, 08:10:31 AM »
Growth funds have outperformed the S&P 500 the past 10 years. So it's not shocking that this one did.

And it's not all actively managed funds that lose to the index in the short term--just nearly all of them. By random chance, or even skill, some do beat the index in the short or medium term. There are incredibly few that do it for too long--and that's why you know them by name. Lynch did it for a couple decades. Buffett has done it for a long time. Buffett's fund is a completely different case though, and there are a number of reasons why he used to have a leg-up on the index fund. It's unclear whether he'll be able to keep that up going forward though.

http://www.nytimes.com/2014/07/27/your-money/heads-or-tails-either-way-you-might-beat-a-stock-picker.html?_r=0

Frugal_NYC

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #20 on: May 20, 2015, 09:06:40 AM »
Completely agree with using index funds that track the market as the vast percentage of your portfolio, I do have a question though...

My 401K has an actively managed fund that dates back to 1960 which has significantly outperformed the S&P, especially over the last 25 years.  The fund has a moderate expense ratio of .66%.  What is a reasonable percentage of my portfolio to allocate to this fund?

Edit** Most of the funds' separation from the index has occurred within the last decade though (as forumm points to above)
« Last Edit: May 20, 2015, 09:08:46 AM by Frugal_NYC »

Scandium

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #21 on: May 20, 2015, 10:27:20 AM »
Completely agree with using index funds that track the market as the vast percentage of your portfolio, I do have a question though...

My 401K has an actively managed fund that dates back to 1960 which has significantly outperformed the S&P, especially over the last 25 years.  The fund has a moderate expense ratio of .66%.  What is a reasonable percentage of my portfolio to allocate to this fund?

Edit** Most of the funds' separation from the index has occurred within the last decade though (as forumm points to above)

Why is everyone so obsessed about beating the S&P? It's not the only index out there.. Is the S&P the appropriate comparison for this fund? Is it a large cap US fund?

Perhaps it's low on tech stocks so avoided some losses in 2000? Or maybe it's an international or small cap fund?

Frugal_NYC

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #22 on: May 20, 2015, 02:42:27 PM »
Completely agree with using index funds that track the market as the vast percentage of your portfolio, I do have a question though...

My 401K has an actively managed fund that dates back to 1960 which has significantly outperformed the S&P, especially over the last 25 years.  The fund has a moderate expense ratio of .66%.  What is a reasonable percentage of my portfolio to allocate to this fund?

Edit** Most of the funds' separation from the index has occurred within the last decade though (as forumm points to above)

Why is everyone so obsessed about beating the S&P? It's not the only index out there.. Is the S&P the appropriate comparison for this fund? Is it a large cap US fund?

Perhaps it's low on tech stocks so avoided some losses in 2000? Or maybe it's an international or small cap fund?

I just said S&P because that's what came up on my interactive chart lol.  The fund is T. Rowe Price New Horizons (PRNHX) so Russell 2000 would be a better comparison - it outperforms all of them I think - 11.6% since inception
« Last Edit: May 20, 2015, 02:45:59 PM by Frugal_NYC »

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #23 on: May 20, 2015, 09:45:07 PM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Here is a comparison with three indexes.  Pick your poison.  FGCKX and SP500 as of 5/20, Russell data as of 5/19.  Russell 1000 Growth is a US large cap growth index.  Russell 3000 is a US total stock market index.

Fund/Benchmark 1 Yr    3 Yr    5 Yr    10 Yr   
FGCRX23.9923.0620.2511.95
S&P 500 TR15.8520.5017.13  8.23
Russell 1000 Growth18.5720.7317.35  9.37
Russell 300015.1120.8316.28  8.53

DavidAnnArbor

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #24 on: May 21, 2015, 07:21:46 AM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Here is a comparison with three indexes.  Pick your poison.  FGCKX and SP500 as of 5/20, Russell data as of 5/19.  Russell 1000 Growth is a US large cap growth index.  Russell 3000 is a US total stock market index.

Fund/Benchmark 1 Yr    3 Yr    5 Yr    10 Yr   
FGCRX23.9923.0620.2511.95
S&P 500 TR15.8520.5017.13  8.23
Russell 1000 Growth18.5720.7317.35  9.37
Russell 300015.1120.8316.28  8.53

I tried my best to provide a comparison of FGCKX with an iShares russell 1000 growth index, IWF. To me they seem very similar.

« Last Edit: May 21, 2015, 07:23:22 AM by DavidAnnArbor »

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #25 on: May 21, 2015, 10:02:35 AM »
Finally people proving that Vanguard index is not the only thing to go for! I was getting sick of suggesting other mutual funds and the only responses I would get is "YOU ARE STUPID" "LEARN MORE" "INDEX ALWAYS WINS". Hello people!! With a little research there are funds that have been around for 40+ years that have beat the market and only have a 0.70 expense ratio!! People have proved it on this thread!

Oh and don't give me the bull about you cant look at historical prices! WE ALL ARE!!! Even index we are hoping for it to perform the same as the past or better!
« Last Edit: May 21, 2015, 10:07:30 AM by Killerbrandt »

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #26 on: May 21, 2015, 10:04:28 AM »
Completely agree with using index funds that track the market as the vast percentage of your portfolio, I do have a question though...

My 401K has an actively managed fund that dates back to 1960 which has significantly outperformed the S&P, especially over the last 25 years.  The fund has a moderate expense ratio of .66%.  What is a reasonable percentage of my portfolio to allocate to this fund?

Edit** Most of the funds' separation from the index has occurred within the last decade though (as forumm points to above)

Why is everyone so obsessed about beating the S&P? It's not the only index out there.. Is the S&P the appropriate comparison for this fund? Is it a large cap US fund?

Perhaps it's low on tech stocks so avoided some losses in 2000? Or maybe it's an international or small cap fund?

I just said S&P because that's what came up on my interactive chart lol.  The fund is T. Rowe Price New Horizons (PRNHX) so Russell 2000 would be a better comparison - it outperforms all of them I think - 11.6% since inception

I have the New Horizon fund also! That one has been great!

forummm

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #27 on: May 21, 2015, 11:08:24 AM »
Finally people proving that Vanguard index is not the only thing to go for! I was getting sick of suggesting other mutual funds and the only responses I would get is "YOU ARE STUPID" "LEARN MORE" "INDEX ALWAYS WINS". Hello people!! With a little research there are funds that have been around for 40+ years that have beat the market and only have a 0.70 expense ratio!! People have proved it on this thread!

Oh and don't give me the bull about you cant look at historical prices! WE ALL ARE!!! Even index we are hoping for it to perform the same as the past or better!

If I can read correctly, the title of the thread is saying that most (i.e. not "all") funds/advisers don't beat the market. Some funds do. They are rare, and tend not to do it consistently. Do you know for sure the fund that beat the market in the past X years will continue to do so? No. But most people who do that will lose to the boring Vanguard fund holders. That's why people recommend not taking that risk. You are welcome to take that risk with your money if you like. If you do, I wish you good luck.

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #28 on: May 21, 2015, 11:28:50 AM »
Finally people proving that Vanguard index is not the only thing to go for! I was getting sick of suggesting other mutual funds and the only responses I would get is "YOU ARE STUPID" "LEARN MORE" "INDEX ALWAYS WINS". Hello people!! With a little research there are funds that have been around for 40+ years that have beat the market and only have a 0.70 expense ratio!! People have proved it on this thread!

Oh and don't give me the bull about you cant look at historical prices! WE ALL ARE!!! Even index we are hoping for it to perform the same as the past or better!

If I can read correctly, the title of the thread is saying that most (i.e. not "all") funds/advisers don't beat the market. Some funds do. They are rare, and tend not to do it consistently. Do you know for sure the fund that beat the market in the past X years will continue to do so? No. But most people who do that will lose to the boring Vanguard fund holders. That's why people recommend not taking that risk. You are welcome to take that risk with your money if you like. If you do, I wish you good luck.

My point exactly! There are other funds that BEAT Vanguards Index fund! So why does everyone scream bloody murder when another fund is suggested? Index funds are not safe by a long shot, people are only guessing they keep performing the same. The New Horizon fund mentioned, that is a great fund with a very long record going through many recessions and still beating the Index fund (both are rated high risk). Even the Troweprice Capital Appreciation beat the Vanguard Index fund and is rated moderate risk compared to the Vanguard Index. Vanguard Index is not a for sure safe bet! No one knows how any of the funds will perform in the future. Therefore, we look at historical stats just like the Index fund looks at the S&P for historical reference.

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #29 on: May 21, 2015, 11:50:25 AM »
Sorry, I am just frustrated with the Investing topics because people come in with great ideas and picks, but everyone comes screaming in that they are stupid and have no clue what they are doing. They immediately tell them to go to Vanguard Index fund!! That is the only thing in the world! Well I wish the Investing section will stop thinking we are all stupid for suggesting new funds. Some of us actually do financial analysis work, which means we look at the Beta, financial statements, historical recessions it has gone through, how long the fund has been around, fees, what companies are made up in that fund. So it would be nice for once not going to each and every topic on this section and only seeing Vanguard Index ONLY!!! hahaha

FrugalFan

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #30 on: May 21, 2015, 12:07:17 PM »
Thanks, all.  I see the thread diverted a bit, but I can see now why the math does make sense when fees and taxes are taken into account. I just finished reading Millionaire Teacher (great read!) and he basically explains all the fees and taxes listed by Indexer. If you haven't read it, Killerbrandt, it might be insightful. Yes, there are funds that beat the market, but they are hard to predict ahead of time, which is a key point, and funds that have been good in the past won't necessarily be good in the future, another key point. There are numerous examples in the book of great funds with long performance histories that turn around and do horribly. And fees just stack the odds against funds. So, in the long run, index funds tend to outperform.

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #31 on: May 21, 2015, 12:17:36 PM »
they are hard to predict ahead of time, which is a key point, and funds that have been good in the past won't necessarily be good in the future, another key point.

Why do people keep saying this? Index funds are not guaranteed and are based on historical data also. Why do you think the index funds will perform at 7 to 8 percent? Could it be from looking at the historical charts and seeing how it did? Therefore, if you find a fund and see that it out performed the S&P 500 for 40 years, has a low fee, good beta, and very diverse. Why wouldn't you go with that fund? Just like an index funds, you can't predict the future or how the market goes and all investing is taking a risk right? so why would you not go with that other fund?

Scandium

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #32 on: May 21, 2015, 12:27:16 PM »
they are hard to predict ahead of time, which is a key point, and funds that have been good in the past won't necessarily be good in the future, another key point.

Why do people keep saying this? Index funds are not guaranteed and are based on historical data also. Why do you think the index funds will perform at 7 to 8 percent? Could it be from looking at the historical charts and seeing how it did? Therefore, if you find a fund and see that it out performed the S&P 500 for 40 years, has a low fee, good beta, and very diverse. Why wouldn't you go with that fund? Just like an index funds, you can't predict the future or how the market goes and all investing is taking a risk right? so why would you not go with that other fund?

You seem confused about the difference between index and managed funds. Index funds are guaranteed. They are guarantied to follow the index! (unless it's poorly run). Nobody here is saying index funds won't loose money, or that they will always give 8%. I don't know where you got that? I don't think people here are screaming or calling people idiots either. Yes if you want to talk stock or managed funds picks you will get resistance here, and tons of data thrown at you that you don't want to see. But if that's the case maybe you're in the wrong place..

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #33 on: May 21, 2015, 07:06:42 PM »
However, I'll be the devil's advocate for a minute (I mostly buy index funds).  Here are three global ex-US funds, all benchmarked by the same index in Morningstar (MSCI ACWI Ex USA NR USD).  Two are index funds, one is actively managed.  The active fund has about 0.7% more ER.  Vanguard and Schwab are following different benchmarks though, FTSE vs MSCI, but that's all they have so I can't match that.

Vanguard FTSE All-Wld ex-US Idx Admiral  VFWAX, index fund, 0.14% net ER
Schwab International Index  SWISX, index fund, 0.19% net ER
Schwab International Core Equity Fund SICNX, actively managed, 0.86% net ER

The table below shows the funds' returns for 2010-14, 2015 YTD, and 5 yr (annualized and total) after fees.  As you can see, the actively managed fund is never the lowest performing fund for any of the 6 years shown and beats the two index funds over a 5 year period.  It's total 5 yr return is 21% higher than VFWAX and 11% higher than SWISX.

So, a low ER helps to obtain, but does not guarantee, a better return.

History (04/30/2015)  2010   2011     2012   2013   2014   YTD     5yr  ann  5yr  total
VFWAX11.85-14.2118.5214.49-4.05  9.32  8.29148.9
SWISX  6.61-11.7118.9321.64-5.74  9.3810.20162.5
SICNX10.51-12.1023.7323.95-4.4911.6212.48180.0

Note - I looked at VTIAX also.  It has very similar performance to VFWAX but does not have a 5yr return yet.

It's easy to cherry pick the funds that managed to outperform an index in hindsight. But many studies show that the same funds don't consistently outperform the index. Yes, there's no guarantee that a fund you pick at random will underperform the index for the next few years. But it's much more likely too.

Not cherry picking, it's a fund that I have owned in my 401k for quite some time. 

Edit: Oops, I meant for FGCKX.

For SICNX, that is a new fund purchase for my brokerage account.  I actually bought the index fund SWISX first but then noticed SICNX.  On June 5 I will switch over after 30 days is up so I don't pay 2% fee to sell within 30 days.
« Last Edit: May 21, 2015, 07:44:16 PM by a1smith »

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #34 on: May 21, 2015, 07:36:38 PM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Here is a comparison with three indexes.  Pick your poison.  FGCKX and SP500 as of 5/20, Russell data as of 5/19.  Russell 1000 Growth is a US large cap growth index.  Russell 3000 is a US total stock market index.

Fund/Benchmark 1 Yr    3 Yr    5 Yr    10 Yr   
FGCRX23.9923.0620.2511.95
S&P 500 TR15.8520.5017.13  8.23
Russell 1000 Growth18.5720.7317.35  9.37
Russell 300015.1120.8316.28  8.53

I tried my best to provide a comparison of FGCKX with an iShares russell 1000 growth index, IWF. To me they seem very similar.

You were only able to go back as far as you did (to around June 2008) because the K shares of Fidelity Growth Company only go back that far.  The K shares are 0.71% fee and Fidelity Growth Company (FDGRX) is 0.82%.  I guess for the FGCKX 10 year history Morningstar is using the higher fee FDGRX for the first part of the ten years.  Same fund, different share classes.

So, I used Google and charted a 10 year and 15 year comparison between IWF and FDGRX.  Keep in mind this is a plot of the 0.82% ER fund so FGCKX is even better with 0.71% ER.  You will definitely notice a difference.

10 year - 5/20/05-5/21/15 - FDGRX (167.21%) vs IWF (117.93%)
~15 year - 6/2/00-5/21/15 - FDGRX (83.79%) vs IWF (30.51%)

Edit: added PDF file of the two plots.  Note 6/2/00 is as far back as Google plot would go.  15 year returns lower due to two recessions.
« Last Edit: May 21, 2015, 07:39:48 PM by a1smith »

frugalnacho

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #35 on: May 21, 2015, 07:57:12 PM »
they are hard to predict ahead of time, which is a key point, and funds that have been good in the past won't necessarily be good in the future, another key point.

Why do people keep saying this? Index funds are not guaranteed and are based on historical data also. Why do you think the index funds will perform at 7 to 8 percent? Could it be from looking at the historical charts and seeing how it did? Therefore, if you find a fund and see that it out performed the S&P 500 for 40 years, has a low fee, good beta, and very diverse. Why wouldn't you go with that fund? Just like an index funds, you can't predict the future or how the market goes and all investing is taking a risk right? so why would you not go with that other fund?

They keep saying it because it's true.  Funds that have recently outperformed, or are currently outperforming, are not guaranteed, or even a good indicator of how it will perform in the future.  That's the tricky part that so many have trouble with: accurately predicting which funds will out perform the market long term.  You might pick right and end up filthy rich. Or you might pick wrong and end up broke, or at least with substantially less money.  But you won't really know for 20+ years.

The allure to index investing isn't that it has a guaranteed return (it doesn't) based on historical results.  It's allure is that it removes the risk of picking the right companies in advance, because you just get all of them.  You are guaranteed not to out perform the market, but you are also guaranteed not to under perform the market.  You will chug along at the overall market average every year.  Not only that, but you minimize the expenses which compound over your entire life.

If you want to take on additional risk for additional reward that's your choice.  But statistically not everyone is going to beat the market.  They can't, they are the market, by definition.  I consider myself pretty smart, but I have no illusions that I am so much smarter than all the other investors that I will be able to significantly out perform the majority of them.  This is what all of us are cautioning against.  If you are a noob, you should just invest in index funds.  If you think you know what you are doing picking individual stocks, you should still probably just invest in index funds.  If you are positive you know what you are doing picking individual stocks, you should still probably just invest in index funds. Because statistically speaking you will end up better by just using index funds.

DavidAnnArbor

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #36 on: May 21, 2015, 08:25:44 PM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Here is a comparison with three indexes.  Pick your poison.  FGCKX and SP500 as of 5/20, Russell data as of 5/19.  Russell 1000 Growth is a US large cap growth index.  Russell 3000 is a US total stock market index.

Fund/Benchmark 1 Yr    3 Yr    5 Yr    10 Yr   
FGCRX23.9923.0620.2511.95
S&P 500 TR15.8520.5017.13  8.23
Russell 1000 Growth18.5720.7317.35  9.37
Russell 300015.1120.8316.28  8.53

I tried my best to provide a comparison of FGCKX with an iShares russell 1000 growth index, IWF. To me they seem very similar.

You were only able to go back as far as you did (to around June 2008) because the K shares of Fidelity Growth Company only go back that far.  The K shares are 0.71% fee and Fidelity Growth Company (FDGRX) is 0.82%.  I guess for the FGCKX 10 year history Morningstar is using the higher fee FDGRX for the first part of the ten years.  Same fund, different share classes.

So, I used Google and charted a 10 year and 15 year comparison between IWF and FDGRX.  Keep in mind this is a plot of the 0.82% ER fund so FGCKX is even better with 0.71% ER.  You will definitely notice a difference.

10 year - 5/20/05-5/21/15 - FDGRX (167.21%) vs IWF (117.93%)
~15 year - 6/2/00-5/21/15 - FDGRX (83.79%) vs IWF (30.51%)

Edit: added PDF file of the two plots.  Note 6/2/00 is as far back as Google plot would go.  15 year returns lower due to two recessions.

FDGRX only beat it's related index, IWF, from 2003 to 2008, but since 2008 FDGRX or it's sister K-class FGCKX no longer beats the index returns. Also, from 2000 to 2003 FDGRX did slightly worse than IWF.  The following are the three charts on yahoo finance to show this.

http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":946702800,"customRangeEnd":1041397200,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}

http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":1041397200,"customRangeEnd":1199163600,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}

http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":1199163600,"customRangeEnd":1432180800,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}

Killerbrandt

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #37 on: May 22, 2015, 05:09:15 AM »
they are hard to predict ahead of time, which is a key point, and funds that have been good in the past won't necessarily be good in the future, another key point.

Why do people keep saying this? Index funds are not guaranteed and are based on historical data also. Why do you think the index funds will perform at 7 to 8 percent? Could it be from looking at the historical charts and seeing how it did? Therefore, if you find a fund and see that it out performed the S&P 500 for 40 years, has a low fee, good beta, and very diverse. Why wouldn't you go with that fund? Just like an index funds, you can't predict the future or how the market goes and all investing is taking a risk right? so why would you not go with that other fund?

They keep saying it because it's true.  Funds that have recently outperformed, or are currently outperforming, are not guaranteed, or even a good indicator of how it will perform in the future.  That's the tricky part that so many have trouble with: accurately predicting which funds will out perform the market long term.  You might pick right and end up filthy rich. Or you might pick wrong and end up broke, or at least with substantially less money.  But you won't really know for 20+ years.

The allure to index investing isn't that it has a guaranteed return (it doesn't) based on historical results.  It's allure is that it removes the risk of picking the right companies in advance, because you just get all of them.  You are guaranteed not to out perform the market, but you are also guaranteed not to under perform the market.  You will chug along at the overall market average every year.  Not only that, but you minimize the expenses which compound over your entire life.

If you want to take on additional risk for additional reward that's your choice.  But statistically not everyone is going to beat the market.  They can't, they are the market, by definition.  I consider myself pretty smart, but I have no illusions that I am so much smarter than all the other investors that I will be able to significantly out perform the majority of them.  This is what all of us are cautioning against.  If you are a noob, you should just invest in index funds.  If you think you know what you are doing picking individual stocks, you should still probably just invest in index funds.  If you are positive you know what you are doing picking individual stocks, you should still probably just invest in index funds. Because statistically speaking you will end up better by just using index funds.

That was a very nice and good reply, thank you! That makes good sense.

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #38 on: May 22, 2015, 02:24:22 PM »
Fidelity Growth Company - Class K shares (FGCKX) - actively managed, 0.71% ER
S&P 500 index
Growth Company beats the S&P 500 in every metric for 10 years. 


Shouldn't you be comparing FGCKX with a Large Cap Growth Index to determine whether the active management strategy beats the market?

Here is a comparison with three indexes.  Pick your poison.  FGCKX and SP500 as of 5/20, Russell data as of 5/19.  Russell 1000 Growth is a US large cap growth index.  Russell 3000 is a US total stock market index.

Fund/Benchmark 1 Yr    3 Yr    5 Yr    10 Yr   
FGCRX23.9923.0620.2511.95
S&P 500 TR15.8520.5017.13  8.23
Russell 1000 Growth18.5720.7317.35  9.37
Russell 300015.1120.8316.28  8.53

I tried my best to provide a comparison of FGCKX with an iShares russell 1000 growth index, IWF. To me they seem very similar.

You were only able to go back as far as you did (to around June 2008) because the K shares of Fidelity Growth Company only go back that far.  The K shares are 0.71% fee and Fidelity Growth Company (FDGRX) is 0.82%.  I guess for the FGCKX 10 year history Morningstar is using the higher fee FDGRX for the first part of the ten years.  Same fund, different share classes.

So, I used Google and charted a 10 year and 15 year comparison between IWF and FDGRX.  Keep in mind this is a plot of the 0.82% ER fund so FGCKX is even better with 0.71% ER.  You will definitely notice a difference.

10 year - 5/20/05-5/21/15 - FDGRX (167.21%) vs IWF (117.93%)
~15 year - 6/2/00-5/21/15 - FDGRX (83.79%) vs IWF (30.51%)

Edit: added PDF file of the two plots.  Note 6/2/00 is as far back as Google plot would go.  15 year returns lower due to two recessions.

FDGRX only beat it's related index, IWF, from 2003 to 2008, but since 2008 FDGRX or it's sister K-class FGCKX no longer beats the index returns. Also, from 2000 to 2003 FDGRX did slightly worse than IWF.  The following are the three charts on yahoo finance to show this.

http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":946702800,"customRangeEnd":1041397200,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}


http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":1041397200,"customRangeEnd":1199163600,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}


http://finance.yahoo.com/echarts?s=FDGRX+Interactive#{"comparisons":"IWF","customRangeStart":1199163600,"customRangeEnd":1432180800,"comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"custom"}

Thanks for the info.  Your links weren't working so I fixed them in the quote above.

Your 2000-2003 plot is incorrect.  You plotted beginning 1/1/2000 but it looks like IWF didn't exist until 5/22/2000; at least that's when its plot starts.

Here is a fixed plot for FDGRX, IWF compare during 5/22/2000-12/31/2003.  FDGRX is -43.89%, IWF is -45.51% so FDGRX was better.

Looking at your 2003-2008 plot FDGRX was significantly better than IWF, 120.11% vs 58.94%

Looking at your 2008-now plot FDGRX edges out IWF, 77.41% vs 75.12% for an additional 2.29% return.

So, looks like FDGRX was better for all three time periods.


DavidAnnArbor

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #39 on: May 22, 2015, 03:39:20 PM »
According to an article in Zacks FDGRX has a precious metals component as well as a small cap growth component. "This Large Growth fund, as of the last filing, allocates their fund in three major groups; Large Growth, Small Growth and Precious Metal. "
http://finance.yahoo.com/news/guide-fidelity-growth-company-fdgrx-133001698.html

This would go a long way toward explaining why FDGRX did so well in the 2003-2008 period when precious metals outperformed a large growth index.

a1smith

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Re: Math - 80% (or 90%) of Mutual Funds/Advisers don't beat the market
« Reply #40 on: May 23, 2015, 09:42:11 AM »
According to an article in Zacks FDGRX has a precious metals component as well as a small cap growth component. "This Large Growth fund, as of the last filing, allocates their fund in three major groups; Large Growth, Small Growth and Precious Metal. "
http://finance.yahoo.com/news/guide-fidelity-growth-company-fdgrx-133001698.html

This would go a long way toward explaining why FDGRX did so well in the 2003-2008 period when precious metals outperformed a large growth index.

That's probably why.

One thing to note about comparing these two with plots is that it isn't accounting for dividends, LT & ST cap gains.  If you plot IWF and FDGRX for 2014 it shows 12.22% for IWF and 10.81% for FDGRX.  If you look at 2014 total return on Morningstar it is 12.78% for IWF and 14.44% for FDGRX.