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well, someone who may not know better may perceive they are getting a much better value than they really are.
True but it really is impossible to judge the value of a dollar someone else spends on a service for themselves. For some folks paying someone else to deal with x so they don't have to think about it daily is worth the cost. I know everyone on CD is cool as a cucumber, never worries about their investments, retirement plan, your choices, everyone here rebalances as they should and on and on but that's not the norm
The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross-section of mutual fund α estimates.
It's impossible to tell whether actively managed funds that beat the market do so out of luck or skill, according to a new study by the professors who've championed index investing for years.
The claim means that investors can't know for sure how good their active manager is, say the professors, Eugene Fama and Kenneth French.
"People don't understand the effects of chance [on returns]," said Mr. Fama, professor of finance at the University of Chicago Booth School of Business. "And it's impossible to tell how big an element chance is in [good performance]."
Blast at 'Actives'
The latest Fama-French study is another piece of ammunition to support their view that most active managers can't consistently beat index funds, which track the market. Underpinning that is the efficient-market hypothesis, developed by Mr. Fama in the 1960s, that states that assets are appropriately priced since the market has all available information.
i like fidelity growth co as an example FDGRX . that has been one of my favorite fidelity funds since the inception.
BTW this is large cap growth fund. The S&P 500 index is blended large cap (less volatile).
During the last 3 years this fund has underperformed its benchmark.
Over the last 5 years its alpha is +0.38. So it has done slightly better than the benchmark index.
I still say past performance will give you no guarantees on this fund. If you made money before 2009 then thank your lucky star.
the fact is someone asked for a sample fund and thats my sample i use.
the past may not reflect the future but remember it cuts both ways. like i said the more popular indexing becomes the more all the same stocks are bought .the more over valued they will become making it easier for fund managers to find value elsewhere.
folks worry to much about this crap.
they need to concentrate on better portfolios that work well together and most important match their pucker factor so they can stay the course.
without getting those two pieces of the puzzle right indexing and expenses are a moot point as the most severe damage comes from jumping ship and the facts and figures bear that out as truth..
BTW this is large cap growth fund. The S&P 500 index is blended large cap (less volatile).
During the last 3 years this fund has underperformed its benchmark.
Over the last 5 years its alpha is +0.38. So it has done slightly better than the benchmark index.
I still say past performance will give you no guarantees on this fund. If you made money before 2009 then thank your lucky star.
what you are paying a manager for is their style and weighting. what you do not want to pay them for is closet indexing . that is where the fund basically mimics the index when all is said and done.
many funds are just that and it is a waste of money if you are paying a manager.
BTW this is large cap growth fund. The S&P 500 index is blended large cap (less volatile)...
Quote:
Originally Posted by mathjak107
the fact is someone asked for a sample fund and thats my sample i use.
Probably the most reliable model for equity performance is the Fama-French 3 Factor Model. See Fama or see Fama And French Three Factor Model Definition | Investopedia for a simple definition. The quantitative research underneath this, which helped earn Fama the Nobel Prize in Economics, found that over the past century, value stocks outperform growth stocks; similarly, small cap stocks tend to outperform large cap stocks.
The traditional asset pricing model, known formally as the capital asset pricing model (CAPM) uses only one variable to describe the returns of a portfolio or stock with the returns of the market as a whole. In contrast, the Fama–French model uses three variables. Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks with a low Price-to-Book ratio (P/B, customarily called value stocks, contrasted with growth stocks). They then added two factors to CAPM to reflect a portfolio's exposure to these two classes:
... and...
There is a lot of debate about whether the outperformance tendency is due to market efficiency or market inefficiency. On the efficiency side of the debate, the outperformance is generally explained by the excess risk that value and small cap stocks face as a result of their higher cost of capital and greater business risk. On the inefficiency side, the outperformance is explained by market participants mispricing the value of these companies, which provides the excess return in the long run as the value adjusts.
Clearly, the data show over the long run that large cap growth underperforms the total market (because small cap value over performs). Clearly, in the case of FDGRX, the opposite is true - at least in the past decade or so.
Will it continue to do so going forward? Who knows.
Quote:
Originally Posted by mathjak107
... the past may not reflect the future but remember it cuts both ways. like i said the more popular indexing becomes the more all the same stocks are bought .the more overvalued they will become making it easier for fund managers to find value elsewhere.
An interesting theory. Let's assume a fair bit of market inefficiency for the moment. Let's assume growth in index funds occurred in those funds that do not reflect the entire worldwide market. For example let's assume growth occurred in, say, a specific sector such as consumer durables or technology or a specific geography such as Brazil. I think your theory is that skilled managers can find value plays in other out-of-favor sectors such as basic materials or airlines. I think by definition, out-of-favor sectors or stocks will be inexpensive - a low P/E. That fits with the Fama-French 3 factor model, as by definition, value stocks have low P/E. Note that the growth fund you mentioned FDGRX, by investing in growth, picks high P/E stocks because by definition high growth translates to high P/E.
However, few academics believe the market has a lot of inefficiency. Most academics, based on research, believe the markets exhibit a high degree of efficiency (not perfectly efficient, mind you - but quite efficient). Let's assume markets are, indeed, quite efficient. Then, if some investors descend upon sector index funds, which in turn buy more underlying securities with their cash (a simplification of how it works), that creates a trading opportunity. Other investors will see the price of an individual equity inside the sector index has having been bid up (as you say), and will see the opportunity to reap an excess expected return by shorting the stock. Investors would descend upon these expensive stocks like hungry piranha upon a steer that wandered into a river. Very rapidly, prices normalize.
Let's assume instead that the popularity of index funds occurs not in a sector specific fund, but in index funds that invest in the total market worldwide. I don't think the type of scenario you posit would happen.
Again, none of us know the future. Well, Mrs. SportyandMisty does, but that is a topic for a different forum.
Quote:
Originally Posted by mathjak107
... folks worry to much about this crap.
^^^ +1 ^^^
Back to the OP, if the OP's financial assets are sufficient at the 99.999% level to support retirement, then the OP, as you say, should not worry too much about this crap. The race is over, and the OP crossed the finish line and should probably stop running. The marathon is over. Have a glass of wine & enjoy the sunset.
Quote:
Originally Posted by mathjak107
... they need to concentrate on better portfolios that work well together and most important match their pucker factor so they can stay the course.
without getting those two pieces of the puzzle right indexing and expenses are a moot point as the most severe damage comes from jumping ship and the facts and figures bear that out as truth..
^^^ +1 ^^^
Imagine a world where you have sufficient assets. Then, you don't need to worry about them -- and you don't need to check your balances more than a couple times per year, you don't need to watch CNBC or FBN or Bloomberg, and you don't need to bother with reading the WSJ or Fortune or Forbes or IBD or even the business section of the local newspaper, and you don't need to worry if Merrill Lynch is charging you 1.5%.
You should NEVER ask for investment advice on an Internet Forum.
Bogleheads drink the buy and hold Kool Aid, which will get you in trouble during a bear market.
The fee you pay for proper risk management pales in comparison to what you will lose during a market downturn if you are not hedging.
Are you saying Bogleheads have become a cult?
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