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i found it interesting that vanguard , the grandpappy of buy and hold may sport some of the most successful market timers yet.
i happen to notice something very odd about VTSMX . that is vanguards total market fund .
the oddity is if you look at morningstars invester returns,unlike the investor doing worse than the fund as the typical results show the investor actually did better.
in fact the investor through timing actually beat the funds buy and hold return over almost every time frame.
is there a reason ? maybe!
s&p 500 index funds are very popular in 401k's while total market funds are not.
looking at VFINX ,the s&p 500 fund which is popular with 401k's the results were the opposite. investors once again did worse than buy and hold.
401k investors for the most part are a pretty financially ignorant group and most have no clue what is going on so they basically just sit .(not a bad thing to do ).
basically the total market fund version was traded a lot more by more savy investors and institutions and had many investors who bailed out and timed the buy back better.
but what i found interesting was:
the fidelity version of their total market had more typical results .
investor returns over 15 years was 4.84 vs 5.13 for their total market fund fund.
it looks like vanguard seems to have more active traders in their total market fund that got luckier and timed their buys and sells better.
it has nothing at all to do with vtsmx being a bigger more diverse fund ,it only has to do with inflow and outflow timing.
in fact the 10 year returns showed the same results. a lot more trading and a lot better timing.
in fact what i said above is evident in vfinx's returns.
fund returns over 15 years were 4.36% , investor returns were a mere 2.29%. what a whopping difference in investor ability to call things right. you can clearly see the s&p 500 fund investors as a group got it wrong very badly .
that is unskilled investors bailing out of 401k's at the wrong time as opposed to the more savy group that tended to own the total market funds.
clearly as a group vanguards total market fund investors are not in the buy and hold camp and seem to be quite good at doing what they do compared to their less savy cousins in the s&p 500 funds..
Last edited by mathjak107; 06-06-2014 at 03:43 AM..
It explains why investor returns (DWR) are lower than average returns (GAR) using several academic papers.
For those who are too lazy to read a 1 page blog,
Quote:
"Academic studies by Brad Barber and Terrance Odean (see notes below) find that individual investors experience reduced returns with their stock trading accounts, with increased active trading a key reason in lowering returns.
Examining 66,465 US household trading accounts over the 1991 – 1996 period, Barber and Odean find that the average household account earned an annual return of 16.4% over the period, compared to the 17.9% market return. Those households which traded most earned an annual return of 11.4%."
It concludes
Quote:
The study concludes that “the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.”
It contradicts nothing.
you are missing the entire point. Vanguards total market fund shows their investors did beat the fund .
That my friend is man bites dog. You can pick any other funds or even total market funds from other families and the results are all the same , investors lagged.
Vanguards fund seems to be the exception. The numbers show that to be so.
Let's get back to the original VTSMX vs VFINX issue. Here's my explanation on why 15-yr VTSMX DWR is 2% higher than GAR.
Did VTSMX investors buy the fund when the price was low? Yes. Are they active traders and know how to time the market? No.
Vanguard investors used tax loss harvesting in 2001-2002 when stock market crashed. Many sold VFINX to realize capital loss and bought VTSMX (to avoid wash sale rule). FYI, VTSXM was introduced in 1994 and the market did well between 1994 and 2001. Not to realize capital gains, they waited till market crash in 2001 to convert VFINX into VTSMX to realize capital loss. This can explain the larger difference between DWR and GAR for 15 years than for 1,3,5,10-yr return differences.
You may call buying VTSMX when low as timing the market. But in my view, it's a tax loss harvesting.
As for larger 3-yr DWR for FSTVX, here's my hypothesis. In 2011 (roughly 3 years ago), Fidelity lowered its advantage fund minimum requirement from 100k to 10k. This triggered many investors to convert FSTMX into FSTVX for lower ER. And as you know, the prices of those funds 3 yrs ago were much lower than today's. Large outflow from FSTMX and large inflow to FSTVX 3 yrs ago explains why FSTMX 3-yr DWR is low and FSTVX 3-yr DWR is high. In my opinion, this is hardly timing the market. It's a conversion to lower the fees.
To answer your main question, yes, I agree that VTSMX investors are savvier than VFINX investors. Not because they can time the market better. But because they know how to use tax loss harvesting to defer the tax.
Last edited by acegolfer; 06-07-2014 at 02:47 PM..
But the reverse should have been true then as well. tax loss harvesting from the total market fund in to the s&p 500 fund should have produced better results.
We know market timing rarely works out but it is bizarre how this fund stood out. There is no long term record on the fidelity advantage fund but the spartan total market fund did not have the long term results vanguard did by a wide margin.
But the reverse should have been true then as well. tax loss harvesting from the total market fund in to the s&p 500 fund too timing that better too. But it wasn't.
The real answer is there is no explanation why every time frame except I think 1 beat the fund while few fund families had similar long term results.
But again there is little explanation why other fund families do not have such wide spreads out to 10-15 years. Tax harvesting was done by many investors
If VTSMX investors were active traders who could time the market, how can you explain this?
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