10 rules of investing

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mikef07 said:   https://www.americanfunds.com/funds/details.htm?fundNumber=4

11.93% since 1934 after any and all max fees.
Mike, I have no interest in re-starting the same active vs. passive investing debate that has been fought on this forum dozens of times (personally, I believe that there is a time and a place for both) but as you and many others are aware, there is a reason that these debates just never end. Namely, it's because both sides have plenty of material to work with.

Just to take your own example here, according to Morningstar, when compared to S&P 500 TR this fund is -2.22% for the 1 year period, -3.17% for 3 years, -1.22% for 5 years and -0.41% for 10 years.

snork615 said:   14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.Then why do non-indexing rich guys Warren Buffet and Peter Lynch recommend indexing?

Which is less likely to get the average stock investor in trouble, a total market index fund or actively managed funds?

docjoo said:   No reason to find the next Apple. AAPL is just warming up...we will see $1,000 per share by next year. Invest AAPL for the long term since there is no another AAPL right now.Why is AAPL immune enough to Google, Samsung, and Qualcom?

germanpope said:   larrymoencurly said:   germanpope said:   11. Market timing works sometimes.

12. Mutual funds want you to stick it out because they lose their fee if you leave their vehicle.

13. Everyone talks about how great the index is after it bounces back. But the timing of when you invest and when you need the money is largely just luck.
13: I thought the odds favored people being in the market at any time because 2 out of 3 trading days were positive rather than negative.
I am not sure what time frame is being used for the 2 out of 3 trading days, but that statistic would certainly be vastly different in different time periods
I think I first read it from John Drescher (had a newsletter, appeared on Wall Street Week), and I think Mark Hulbert mentioned the number in a Forbes or NYT column in the 1990s, when he also wrote that half the newsletters he tracked over a long period were bearish, half were bullish.

How well seem written. If it were that simple in reality.

https://www.americanfunds.com/funds/details.htm?fundNumber=4

11.93% since 1934 after any and all max fees.

Stock market and or same allocation in stock market has not done that I do not believe.

Does that mean it will do it over the next 45? No one has a clue, but again it can be done. Does that mean it won't? No one knows that either.


I'll give you that one but the market did 11.1% since 1934 (post crash), .8% difference. As has been said, of all the active market guys out there, one or two have beaten the market. To know that one guy or fund to do that is almost impossible as it to know the next Microsoft. To pick an index fund with low expense ratio? My dog could do it. My only regret is not dollar cost averaging into index funds since about 1975 when Sir John came out with them.

geo123 said:   mikef07 said:   https://www.americanfunds.com/funds/details.htm?fundNumber=4

11.93% since 1934 after any and all max fees.
Mike, I have no interest in re-starting the same active vs. passive investing debate that has been fought on this forum for dozens of times (personally, I believe that there is a time and a place for both) but as you and many others are aware, there is a reason that these debates just never end. Namely, it's because both sides have plenty of material to work with.

Just to take your own example here, according to Morningstar, when compared to S&P 500 TR this fund is -2.22% for the 1 year period, -3.17% for 3 years, -1.22% for 5 years and -0.41% for 10 years.


Nor do I have an interest, but he asked what fund has outperformed the market over 45 years+. That one has. I said nothing more. I have no dog in the fight as I do not own that fund.
jeffc said:   


I'll give you that one but the market did 11.1% since 1934 (post crash), .8% difference. As has been said, of all the active market guys out there, one or two have beaten the market. To know that one guy or fund to do that is almost impossible as it to know the next Microsoft. To pick an index fund with low expense ratio? My dog could do it. My only regret is not dollar cost averaging into index funds since about 1975 when Sir John came out with them.


I will give you that it is a very good reason to pick index funds. If you don't believe you can pick that fund or don't have faith in a manager or fund philosophy then index funds are a great place to go. Personally I don't have faith in my stock picking ability which is why you never see me in the stock discussion thread. Those guys over there do though and have proven one can beat the market.

larrymoencurly said:   snork615 said:   14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.Then why do non-indexing rich guys Warren Buffet and Peter Lynch recommend indexing?

Which is less likely to get the average stock investor in trouble, a total market index fund or actively managed funds?


The same reason I recommend them to anyone I know. I simply don't have faith in the ability of 99% of people to weed through the crap. Law of %s. I know that it is possible to beat the indexes long term, but know that most will not if they try so indexes are the safe place to put their $ which is basically what you said.

Mike, is that 5% saving account still available? I only found a prepaid charge card at aceelitecard.

unnamedone said:   Mike, is that 5% saving account still available? I only found a prepaid charge card at aceelitecard.

That is where I log in (aceelietecard.com or something like that). You load it onto the prepaid charge card, transfer it into savings immediately. Check fees. Some people pay fees and some do not. We don't use the card at all. A few people have PMed me and said they have an account now and they make sure they minimize fees, but still should be well over 4%.

mikef07 said:   unnamedone said:   Mike, is that 5% saving account still available? I only found a prepaid charge card at aceelitecard.

That is where I log in (aceelietecard.com or something like that). You load it onto the prepaid charge card, transfer it into savings immediately. Check fees. Some people pay fees and some do not. We don't use the card at all. A few people have PMed me and said they have an account now and they make sure they minimize fees, but still should be well over 4%.

Mike, you're not relating the full story here. As you explained in this thread, the Netspend account is a special deal through your wife's employer, who probably eats the fees and raises or removes the $5K cap. There's no way the general public at this time can get a new FDIC-insured deposit account with ~5%+ APY without gimmicks such as high fees, low caps, etc.

glxpass said:   mikef07 said:   unnamedone said:   Mike, is that 5% saving account still available? I only found a prepaid charge card at aceelitecard.

That is where I log in (aceelietecard.com or something like that). You load it onto the prepaid charge card, transfer it into savings immediately. Check fees. Some people pay fees and some do not. We don't use the card at all. A few people have PMed me and said they have an account now and they make sure they minimize fees, but still should be well over 4%.

Mike, you're not relating the full story here. As you explained in this thread, the Netspend account is a special deal through your wife's employer, who probably eats the fees and raises or removes the $5K cap. There's no way the general public at this time can get a new FDIC-insured deposit account with ~5%+ APY without gimmicks such as high fees, low caps, etc.


Crap. Totally forgot about the cap as that is somewhat new and there used to be no cap for anyone. A few on this board (at least from what they told me) got in before the cap. The point is not this account. It is that there are numerous things available in the world now that defy these so called rules. I know there are people on this board who have access to various investment vehicles not necessarily available to the masses.

For example geo I believe said that he can get some active funds through his job that waive all loads. Therefore all he is responsible for would be expense ratio fees.

germanpope said:   dhodson said:    ... The problem is that there is no method to figure out who will beat the index ahead of time. Since most gurus dont beat the index over the long haul, the return is typically better just using a low cost index method. If you know how to pick warren buffets ahead of time then you will be richer than warren buffet.

I am sure there people that are just consistently good traders while at the same time being good stock pickers.

This person might not be able to manage a billion at a rate they can manage their quarter or half million. But they might be consistently able to make a living on their small potatoes. And their living may be well above an index return.


You still cant identify who that person is ahead of time. I could probably beat the market for some period of time possibly even a decade. Would that make me good at it....nope just lucky. There is a very very small percentage who can do it for 3-4 decades but there is no method of identifying who that person is at the moment. I doubt even Warren Buffet could repeat his record if he had to start all over from scratch..

mikef07 said:   For example geo I believe said that he can get some active funds through his job that waive all loads. Therefore all he is responsible for would be expense ratio fees.Correct. My firm gives us access to excellent actively managed funds that not only waive all loads for us but also give us accesss to their institutional shares, which have expense ratios that are far lower than the expense ratios of their regular retail shares. So, the expense associated with putting money into these funds often ends up being about the same or even lower than index funds' expense ratios (although we have access to index funds' institutional shares as well).

I posted the above not to brag but to illustrate a point that I've been making for a while. Namely, that while setting forth all the well known arguments for and against passive vs. active approaches isn't a waste of time as a ton of people don't know them, at the end of the day there are a number of other considerations that can change the outcome of the debate. In other words, while all the criticisms of both approaches out there are valid, there is no inherent advantage that index funds have over actively managed funds and vice versa. Instead, it all has to do with specific situations, time horizons and costs.

That last variable, cost, will alone often affect the outcome of the debate. That's because as the index fund proponents always correctly point out, in order for an actively managed fund to be more advantageous, it has to first overcome its own higher expense structure and then has to return a higher risk-adjusted return. Most actively managed funds fail to do this and even those that do typically fail to do so consistently (hence, the perfectly appropriate argument that you can't really pick out Warren Buffett's of the world ahead of time).

When you remove all loads and significantly reduce expenses of otherwise excellent actively managed funds to the level where they are comparable to those of index funds, then you can have the best of both worlds: benefit from the usual advantages of actively managed funds without paying a premium for it. It still doesn't mean that an actively managed fund will necessarily be more advantageous, as the manager/management team still has to be able to make the right decisions, which is no easy task, but when the burden of substantially higher expenses is removed, their task becomes substantially easier.

We all feel this way about a lot of things out there, as we often go for the cheaper option not necessarily because we feel that it is "better," but because we do not believe that the cost premium associated with the more expensive option provides us with sufficient value. Hence, when the cost premium associated with the more expensive option is removed, we often go for it.

For the record, I still have a significant portion of my investments in index funds, so I am an equal opportunity investor

Geo that was nicely phrased in my view.

It is costs that make index funds typically the best approach. In the future, it may get to the point where market forces reduce costs such that managed funds are typically competitive with index funds. At the moment, most people dont have access to "cheap" managed funds especially ones where one can have any convidence (false or not) that the management team is going to deliver. It may also get to the point where active funds are managed primarily by a computer and this may assist in reducing what is likely the biggest assoicated cost.

Additionally, all investing theories involve looking at the past and making the assumption that things in the future will in some way be like the past. Maybe in the future, active funds will be able to outperform even with their additional costs since there will be better ways to predict performance. I doubt it but it isnt impossible. Currently there isnt evidence to support this will happen.

I am primarily a proponent of index funds especially when giving a recommendation. It is the easiest to justify and has the best evidence. It is something however that ill have to periodically re-evaluate as costs and other factors change.

larrymoencurly said:   Then why do non-indexing rich guys Warren Buffet and Peter Lynch recommend indexing?

Which is less likely to get the average stock investor in trouble, a total market index fund or actively managed funds?
Your second question pretty much answers the first question. Namely, an "average investor" has low balances, so that he/she does not qualify for any reductions in loads/expenses, or only qualifies for very small ones. An "average investor" is not likely to be a very disciplined investor, is prone to panick and is likely to move from one fund family to another, all of which mean that the impact of up front loads is greatly exarcerbated for such an investor. Further, an "average investor" does not have the time or the desire to monitor fund and market performance over time and, even when he/she does, does not have the knowledge to make prudent decisions, so it is very difficult for such an investor to pick the funds that give him/her the best likelihood of success.

These are the same investors who, when the market has a good year, start threads here calling themselves "ultra aggressive" and bragging about their one year performance but then, when the market plunges, either disappear completely or end up admitting that they've sold at the bottom and ended up missing out on the upside.

I am not necessarily saying all of the above in a derogatory sense. We all have busy lives and these can be complex topics with no clear answers, so it is difficult for people to find the time to research all of this thoroughly and to then make dispassionate decisions. I am also not trying to imply anything negative about index funds, as they certainly do enjoy plenty of tremendous advantages over their actively managed counterparts, so that even extremely knowledgeable and sophisticated investors almost always own plenty of index funds.

My only point here is that you shouldn't jump to too many conclusions based on Warren Buffet and Peter Lynch recommending indexing, as the reasons for that recommendation have a lot of similarities to the recommendation to stay away from credit cards.

dhodson said:   Geo that was nicely phrased in my view.

It is costs that make index funds typically the best approach. In the future, it may get to the point where market forces reduce costs such that managed funds are typically competitive with index funds. At the moment, most people dont have access to "cheap" managed funds especially ones where one can have any convidence (false or not) that the management team is going to deliver. It may also get to the point where active funds are managed primarily by a computer and this may assist in reducing what is likely the biggest assoicated cost.

Additionally, all investing theories involve looking at the past and making the assumption that things in the future will in some way be like the past. Maybe in the future, active funds will be able to outperform even with their additional costs since there will be better ways to predict performance. I doubt it but it isnt impossible. Currently there isnt evidence to support this will happen.

I am primarily a proponent of index funds especially when giving a recommendation. It is the easiest to justify and has the best evidence. It is something however that ill have to periodically re-evaluate as costs and other factors change.


Problem is you say that there currently isn't evidence to support this (which is true), but there also isn't evidence that supports that it won't. The only evidence anyone can use is past performance and indexers always link to macro studies. Once you do that then a person can pick an active fund that outperformed which in essence would be a micro study. They are using the same evidence so to speak and even then it doesn't guarantee future results. In the end costs are one facet of picking funds. If you buy into the philosophy of an active manager then you may go with that fund. Whether that works in the future no one knows which is why it is a futile argument for both sides.

I posted two funds above, both have outperformed the stock market, one for 39 or so years, the other for over 70 years. Will that happen in the future? Who the heck knows?

I also would not say it makes index fund the best approach. The best approach would be the one that ends up with the highest returns which will be impossible to know ahead of time. It makes it the most consistent approach with less likely deviation of the ups and downs of active funds.


SO in the end why does mikef07 invest in active fund A over index funds A? I believe in the philosophy of the management style, team, etc. They have proven (albeit in the past) that this philosophy has worked, that they have adapted to keep it working (so far) and I believe it will still be true going forward. I will either be right or wrong. If index funds A does 10% then if I am right I may be at 11% and if I am wrong I may be at 9%. IMO I will be splitting hairs either way.

In the end I would always recommend index funds to the average investor, but I am not naive enough to believe that there are not more lucrative investments in the marketplace depending on access and the personal choices that people come across.

Everyone knows index funds are the way to go... but what fun is that? Gambling is way more fun!

mikef07 said:   dhodson said:   Geo that was nicely phrased in my view.

It is costs that make index funds typically the best approach. In the future, it may get to the point where market forces reduce costs such that managed funds are typically competitive with index funds. At the moment, most people dont have access to "cheap" managed funds especially ones where one can have any convidence (false or not) that the management team is going to deliver. It may also get to the point where active funds are managed primarily by a computer and this may assist in reducing what is likely the biggest assoicated cost.

Additionally, all investing theories involve looking at the past and making the assumption that things in the future will in some way be like the past. Maybe in the future, active funds will be able to outperform even with their additional costs since there will be better ways to predict performance. I doubt it but it isnt impossible. Currently there isnt evidence to support this will happen.

I am primarily a proponent of index funds especially when giving a recommendation. It is the easiest to justify and has the best evidence. It is something however that ill have to periodically re-evaluate as costs and other factors change.


Problem is you say that there currently isn't evidence to support this (which is true), but there also isn't evidence that supports that it won't. The only evidence anyone can use is past performance and indexers always link to macro studies. Once you do that then a person can pick an active fund that outperformed which in essence would be a micro study. They are using the same evidence so to speak and even then it doesn't guarantee future results. In the end costs are one facet of picking funds. If you buy into the philosophy of an active manager then you may go with that fund. Whether that works in the future no one knows which is why it is a futile argument for both sides.

I posted two funds above, both have outperformed the stock market, one for 39 or so years, the other for over 70 years. Will that happen in the future? Who the heck knows?

I also would not say it makes index fund the best approach. The best approach would be the one that ends up with the highest returns which will be impossible to know ahead of time. It makes it the most consistent approach with less likely deviation of the ups and downs of active funds.


SO in the end why does mikef07 invest in active fund A over index funds A? I believe in the philosophy of the management style, team, etc. They have proven (albeit in the past) that this philosophy has worked, that they have adapted to keep it working (so far) and I believe it will still be true going forward. I will either be right or wrong. If index funds A does 10% then if I am right I may be at 11% and if I am wrong I may be at 9%. IMO I will be splitting hairs either way.

In the end I would always recommend index funds to the average investor, but I am not naive enough to believe that there are not more lucrative investments in the marketplace depending on access and the personal choices that people come across.


This statement doesnt really cut it for me....

but there also isn't evidence that supports that it won't.

Thats like someone saying you cant prove unicorns wont exist in the future.


Sure you can pick a few funds in retrospect that have done great. Im sure there are others. The odds of one picking such a fund is very minimal. How would you decide which funds are going to have a great track record. If you took funds that outperformed lets say 10 years in a row(or any number that you chose), one could show that typically they wont outperform the next 10 most of the time. There just isnt a method to pick them that has any validity. If you are picking them now bc all 40 years were great then too bad the fund managers have retired. There arent any propietary strategies involved here that nobody else would pick up on and repeat.

dhodson said:   
This statement doesnt really cut it for me....

but there also isn't evidence that supports that it won't.

Thats like someone saying you cant prove unicorns wont exist in the future.


Sure you can pick a few funds in retrospect that have done great. Im sure there are others. The odds of one picking such a fund is very minimal. How would you decide which funds are going to have a great track record. If you took funds that outperformed lets say 10 years in a row(or any number that you chose), one could show that typically they wont outperform the next 10 most of the time. There just isnt a method to pick them that has any validity. If you are picking them now bc all 40 years were great then too bad the fund managers have retired. There arent any propietary strategies involved here that nobody else would pick up on and repeat.


I probably didn't write that as eloquently as I would have liked. I would agree that you can throw 90% of the funds out because they have always underperformed (in the past of course) and their fees and management (IMO) can't overcome those things. That leaves maybe 10% of quality active funds. I think if you said that statement about the 90% portion we threw out then that would be akin to the unicorn statement. Of the 10% that have either matched indexes, outperformed them more often than not, or maybe slightly underperformed them more often than not it is simply unknown whether any of these will do so in the future. I would be careful as to "that manager has retired" statements only because if you truly dove in and researched some funds you would see that many rarely rely on 1 manager. Even though lets say I pick out 5 funds that I like and that have done well up until this point AND i like the philosophy AND the management style is what I am looking for so I say that I am going to invest in those you are correct there still is no guarantee that the same will occur over the next 5, 10 , 15, 20, etc years, but (IMO) it is possible and past data at least somewhat supports it. That is also where my statement of "there is no evidence that they won't" is relevant (IMO). For me I simply diversify. Indexes, active, 5% savings, RE, commercial RE, is where I put my money. In the long run I hope I am hedged enough that no underperformer from any I have listed brings me down too badly.

Heck I don't know if my actives will outperform my indexes or vice versa and IMO I will be splitting hairs in the end, but I hope people realize there are more ways than 1 to skin a cat. I absolutely respect a person't opinion who says I simply don't have faith in any philosophy or manager to be able to convince me that they WILL beat the indexes so long as they understand it is highly likely that someone will. We just don't know who.

Someone two posts up wrote "indexes are the way to go" and I redded it. I would have also redded a post that said "Actives are the way to go." I simply don't believe in these absolute statements.

Guys, can you please truncate your quotes. It is otherwise very difficult to read all the multi-multi-multi quotes that you are using.

What fund has a "bad philosophy or bad management" on paper. We never know these people from adam and the philosophy is always written such that it sounds good. It probably is written by the marketing team half the time. I realize it isnt one person on management but that only makes it more difficult to actually judge.

Id say you might even have a better chance with a dogs of dow approach where you pick the worst performers (not actually worse but under performers).

Ive not gone over the research lately but im pretty sure the ultimate boglehead folks have done this where they have sub divided and tried picking from those who had a better record over 5-10 years and went forward and again the results were that this didnt provide better returns.

It isnt splitting hairs either. While a 1-2% difference over a year or two doesnt mean much, it certainly does over 30-40. It also isnt just about you personally showing active producing a beneficial effect. Can anyone point to any researcher who shows active works over the long haul or any approach like you are talking about has a record to stand on? Where is the data you are talking about?

Now i do feel active vs index isnt as important as just saving as much as you reasonably can. Saving is a bigger hurdle that people seem to face.
Just to be clear, ive made a bunch of mistakes with the biggest being trusting an insurance agent with my retirement planning and i still to this day own a decent number of individual stocks but im just not seeing an active approach that can be reproduced in a meaningful way that has any real sort of evidence that it will outperform indexing. Im open to the idea that this could change primarily if we could find ways to greatly reduce costs.

dhodson said:   What fund has a "bad philosophy or bad management" on paper. We never know these people from adam and the philosophy is always written such that it sounds good. It probably is written by the marketing team half the time. I realize it isnt one person on management but that only makes it more difficult to actually judge.

Id say you might even have a better chance with a dogs of dow approach where you pick the worst performers (not actually worse but under performers).

Ive not gone over the research lately but im pretty sure the ultimate boglehead folks have done this where they have sub divided and tried picking from those who had a better record over 5-10 years and went forward and again the results were that this didnt provide better returns.

It isnt splitting hairs either. While a 1-2% difference over a year or two doesnt mean much, it certainly does over 30-40. It also isnt just about you personally showing active producing a beneficial effect. Can anyone point to any researcher who shows active works over the long haul or any approach like you are talking about has a record to stand on? Where is the data you are talking about?

Now i do feel active vs index isnt as important as just saving as much as you reasonably can. Saving is a bigger hurdle that people seem to face.
Just to be clear, ive made a bunch of mistakes with the biggest being trusting an insurance agent with my retirement planning and i still to this day own a decent number of individual stocks but im just not seeing an active approach that can be reproduced in a meaningful way that has any real sort of evidence that it will outperform indexing. Im open to the idea that this could change primarily if we could find ways to greatly reduce costs.


Style drift, allocation of a fund, what is the fund trying to accomplish, how much of it is international, type of management, autonomy of management, hierarchy of management, etc. There are tons of things you can look at in a fund and see what the philosophy is. It isn't about looking at returns over the last 10 years. It is about looking at 20 x 10 year periods and seeing what the record is. Then looking at 40 x 5 year periods. Then maybe 5-10 15 year periods. How much did it beat similar types of funds, what about its benchmark, what did the S&P do over that timeframe. What does it do in bull markets? What about bear markets? Even if you can answer everything here and YOU LIKE THE ANSWERS it still is no guarantee it does it over the next x years.

As for where is the data I am talking about? I posted two links to two different funds that each have over 37 years of history and data behind them. Both have beaten your indexes long term. You want to argue that they won't in the future? I have no issue. They may not. No one knows. You can't argue that one has not in the past though since 1934 for one and the other since 1973. Those actives have (to use your words) "worked over the long haul." or (to use your words again) "has a record to stand on." Again will it continue? No clue and anyone who says they have a clue I would run from. If you look at any of their funds that have been around 20 years all have performed somewhat well and "worked". Where I have been baited (and hopefully won't be this time) is that people argue that these "funds are going down" and then we all go back and forth trying to prove that they will/they won't. In the end none of us know. If that is someone's opinion then they should not invest in it. I personally have a different opinion.

Yes 1% is huge over 30 years and if one portion of my portfolio is up 10% and the other 9% or one is 10% and the other 11% I can live with that. Hopefully that 1% is not the difference beetwen me eating or not eating.

okay we disagree on what evidence means then...i have no problem with there being funds that beat index funds. im pretty sure ive said that above...i just dont see any evidence as to how one picks them ahead of time in any sort of a reproducible or quantifiable method. The things you mentioned are like saying i have a good feeling about this one. You cant expect me to believe you would have known 40 years ago that those funds were going to beat the index? What would have told you back then they were winners?

The 1% wont be for you im guessing but im also guessing you save more than most.

dhodson said:   okay we disagree on what evidence means then...i have no problem with there being funds that beat index funds. im pretty sure ive said that above...i just dont see any evidence as to how one picks them ahead of time in any sort of a reproducible or quantifiable method. The things you mentioned are like saying i have a good feeling about this one. You cant expect me to believe you would have known 40 years ago that those funds were going to beat the index? What would have told you back then they were winners?

The 1% wont be for you im guessing but im also guessing you save more than most.


Fair enough point which is why I would never invest in anything with less than 20 years of history. Would I have invested in those when they were less than 10 years old? Not a chance. I agree that it is feeling along with the things I mentioned above. You also invest in index funds because you have a "feeling" that the stock market will go up over time, long term. There is no quantifiable method you can use to tell me how much index funds will go up over the next 20 years or if they will lag active fund X. You simply are basing performance off history and based on history you "feel" it will be between X% and x+y%. No different than what I do. Any investment besides CDs and guaranteed rates are all speculation.

As was pointed out above investing is very person specific. You have access toa 5% risk free savings account and one of the rules is thrown out. You have access to active funds with no loads and low ER and another rule is thrown out. You have a lot of money and are privy to investments the rest of us aren't and another rule is thrown out, etc etc.

but my feeling is the same if active or index that the market will climb over time. I cant remove that from the equation. Secretly im no super happy with that assumption but i dont have a way around it except to consider non market investments.


Obviously, you too are using past performance in this case 20 year data on a fund as a criteria for purchase. This at least can be quantified and if that were the only criteria (which appears it is not for you) then im pretty sure the data does not support it out performing indexing. I dont keep all the charts in my head but the bogle folks have tried subgroup analysis where you pick the winners and try to go forward with them alone. Now one of the problems with that analysis is that costs were definitely a problem especially the further back you go since there was no competition especially from index the further back you go so whatever return you got probably looked great. As i mentioned in an earlier post (but ill try to rephrase it here), unless costs have been reduced, there just isnt any reason to assume active will now typically win unless im going to say history isnt very relative to the future. Id have to say that some how things will now be different otherwise yes i can say that there is a great deal of evidence that indexing will typically outperform active. It isnt the typical investor who has access to situations you mentioned. Additionally if there was a method than was reasonable to reproduce then why stop at active funds. Why not invest directly in stocks for an even better return? It would seem you could invest in stocks with long history and have the less quantifiable features that you like. This isnt ment as a personal attack on you and i doubt im gonna win you over. I also have made considerable errors myself as ive mentioned. I still however feel it is best to recommend to 99% of people to go index. That plus a few other rules would have saved me a couple years of work until retirement.

dhodson said:   but my feeling is the same if active or index that the market will climb over time. I cant remove that from the equation. Secretly im no super happy with that assumption but i dont have a way around it except to consider non market investments.


Obviously, you too are using past performance in this case 20 year data on a fund as a criteria for purchase. This at least can be quantified and if that were the only criteria (which appears it is not for you) then im pretty sure the data does not support it out performing indexing. I dont keep all the charts in my head but the bogle folks have tried subgroup analysis where you pick the winners and try to go forward with them alone. Now one of the problems with that analysis is that costs were definitely a problem especially the further back you go since there was no competition especially from index the further back you go so whatever return you got probably looked great. As i mentioned in an earlier post (but ill try to rephrase it here), unless costs have been reduced, there just isnt any reason to assume active will now typically win unless im going to say history isnt very relative to the future. Id have to say that some how things will now be different otherwise yes i can say that there is a great deal of evidence that indexing will typically outperform active. It isnt the typical investor who has access to situations you mentioned. Additionally if there was a method than was reasonable to reproduce then why stop at active funds. Why not invest directly in stocks for an even better return? It would seem you could invest in stocks with long history and have the less quantifiable features that you like. This isnt ment as a personal attack on you and i doubt im gonna win you over. I also have made considerable errors myself as ive mentioned. I still however feel it is best to recommend to 99% of people to go index. That plus a few other rules would have saved me a couple years of work until retirement.


Hope what I am writing makes sense and I will use your quotes-

You wrote - "As i mentioned in an earlier post (but ill try to rephrase it here), unless costs have been reduced, there just isnt any reason to assume active will now typically win unless im going to say history isnt very relative to the future."

So you are saying history is relevant (some % of history). I agree

You also said - "Id have to say that some how things will now be different otherwise yes i can say that there is a great deal of evidence that indexing will typically outperform active."

I would also agree with this, but I will elaborate. The evidence that supports this is almost always taking all of the index funds and all of the active funds and ranking them 1-10000 (or however many of them are). You come up with a list that 90% (we can use 9000) of the actives have underperformed. That leaves you with 1000 we can say. You then look at different 10 year periods and you see that of those 1000 only about 100 of them are on the top 1000 list time after time no matter what 10 year period you look at. Those are the funds I am interested in. I then look at the various costs, style, style drift, management style, all the things I wrote above and weed them down even further. I then look at the company who owns those funds. I can look and see where I would have ranked had I bought a portfolio of the 4 worst performing funds and then the best (since I would have no clue prior to buying) and you end up with a bunch of relevant data.

In other words you are looking at Macro data and seeing a trend of index funds outperforming 90% of the active funds. I am looking at micro data (fund to fund comparisons) and seeing a similar trend with some of the funds. Hope that makes sense. It is why GEo above said that there is evidence to support both sides. The reason you invest in index funds is the exact same reason I invest in some actives. The past data supports outperformance. If you read all the research every single study supporting index funds that I have seen always compares all indexes to all actives which skews results since it would assume that you have to buy all of one or all of the other.

I also simply don't have the ability or time to do stocks as I feel that is even harder than picking funds, but you can see some on this very board are able to do so and do so with success. I agree that for 99% of people (or a very high number) indexes are the way to go because of max fees, access, low $ amounts available to invest.

ETA: Appreciate the posts and for what its worth I don't expect to change anyone's view, but hopefully at least give people something to think about.

steve1jr said:   Those with excess returns always claim superior skill - until one day the excess returns stop...

"Claim" is not enough. Statistical evidence is a good start.

Excess returns always stop. If they did not, market would not be efficient.

When an idea of excess returns stops giving, you find the next idea.

jeffc said:   germanpope said:   I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do



Let's just say I'm 20 and going to retire at 65. 45 years of working/school and investing. Name one fund, money manager, that has beaten the market for that long. My point is that I don't want someone to beat the index for one or two years "consistently." I want them to beat it every year over time. We have seen that does not happen. Now, if you want to study the market and devote hours and hours every week to market timing, you may do well. Personally, I have a life to live.


I am sympathetic to your satement.

I believe that there are investors that beat the market consistently. Say in year 1, 30% of the managers beat the benchmark. Statistically, only 30% * 30% = 9% (of those 30%) would do the same next year. However, you would observe that, let's say, 15% do that next year.

This observation (15% market beaters vs expected number, 9%, in year 2) indicates that there is skill among investors.

However, the biggest obstacle to these skilled investors doing the same thing for 30 years is capacity. After beating the index for N years straight, their funds attract so much money, that they are unable to do so any longer.

Second biggest obstacle is reverse engineering.

Thus, the best skilled investors are those who:

- don't take outside money,
- are secretive.

Most high Sharpe ideas have limited capacity and need to be guarded.

when i get a chance, ill see if i can find the subgroup analysis. I dont have it at the tip of my finger at the moment. im pretty sure what you suggest about picking the winners has been done (not just looking at all funds) and that picking the winners over a decade or more doesnt give you an advantage going forward. Im not aware of them using any other criteria except the return. There isnt any way for me to quantify the other variables you mentioned so i cant comment further on them. Although i dont have the info at the tip of my finger, i bet some of the bogleheads do. Id bet if you posted your ideas there that someone could put you towards the statistical data. They wont be able to do so with the non quantifiable aspects.

dhodson said:   when i get a chance, ill see if i can find the subgroup analysis. I dont have it at the tip of my finger at the moment. im pretty sure what you suggest about picking the winners has been done (not just looking at all funds) and that picking the winners over a decade or more doesnt give you an advantage going forward. Im not aware of them using any other criteria except the return. There isnt any way for me to quantify the other variables you mentioned so i cant comment further on them. Although i dont have the info at the tip of my finger, i bet some of the bogleheads do. Id bet if you posted your ideas there that someone could put you towards the statistical data. They wont be able to do so with the non quantifiable aspects.

Just remember looking at 1 10 year period, 20 year period, etc. means little no matter which is higher. Look at 20 x 10 year periods and you see a trend. Perfect point would be to use a fund that I linked in the beginning. For it to be over 13% since 1973 it would have to have done better over more 10 year periods (assuming it did not just have a ridiculous 10 year period which it did not) to be able to have done 13% long term.

Indices beat active about 9/10 times over long periods of time. That is good enough for me. We know that active management can add value, the problem is adding enough value to overcome tax drag, trading costs, and management fees/expenses. We also know that luck explains a great majority of short-term outperformance. Of course skill exists, but it is impossible to pick skill a priori. Only after a pattern of outperformance has been established can you say skill exists; and then the conditions which made that skill possible may have changed, muting the benefits of that skill going forward.

Example: Warren Buffett has great skill. But most of his outperformance came early in his career. If you have money to invest today, should you invest in BRKA? Does his past outperformance give you a strong likelihood of future outperformance? Is managing a $200b company as easy as managing a $2b company? Is Warren Buffett going to live to be 100? is Warren Buffett today as skillful (relative to the markets) as he was 50 years ago? Is Warren Buffett's successor likely to be as skillful as he was? Are market inefficiencies as exploitable today as they were 50 years ago when Warren Buffett began investing? All of these questions have to be answered in order to justify investing with Warren Buffett today as opposed to investing in an index fund. The same applies to any other active manager. I would venture it is impossible for someone to prospectively choose an actively managed product and have an *expectedly* higher rate of return than the comparable low cost index product. It is true you may get *lucky* and have a higher return, but I would say it is impossible to expect a higher return. An actively managed fund with ultra-low fees would have the best *expected* chance of higher-than-index returns but there would be no assurance of that and there would be some not-zero chance of marked underperformance as well.

I think a better case can be made for 'smart-index' products like DFA vs Vanguard, as opposed to active vs index.

great!tks for sharing!

psychtobe said:   
Example: Warren Buffett has great skill.


IMO Warren Buffet is a bad example anyways because when you have billions of dollar in capital to commit you can arrange deals that would never be available to the average investor. The investment in BoA that he made last year is a great example of this.

Indices beat active about 9/10 times over long periods of time. That is good enough for me.

You could also write, "Indices beat index funds about 10/10 times over long periods of time. That is good enough for me."

Your statement gives a reason to invest in the index as opposed to blindly picking an active fund.
My revision of your statement gives a reason to invest in the index as opposed to blindly picking an index fund.

Statements like yours are used to show the advantage of index funds. The problem is that it tells us absolutely nothing about the advantage of index funds and as I've shown, the same type of statement shows that index funds are worse than active funds when our measurement is outperformance of the index itself.

The comparison has to be active funds vs. index funds instead of active funds vs. an index. What we ultimately find is that low cost beats high cost. A low cost active fund will beat a high cost index fund. Index funds usually win because they usually have lower costs.

Comparisons are usually made using the universe of active funds vs. the index. The problem is that one can't invest into the index and one doesn't have to blindly pick funds.

If we compare low cost funds to low cost index funds the results will show that this simply is not an important decision.

very nice!

unnamedone said:   The only problem with these rules is they assume the future = the past.

Rule 8: What worked in the recent past is not likely to work going forward.

docjoo said:   No reason to find the next Apple. AAPL is just warming up...we will see $1,000 per share by next year. Invest AAPL for the long term since there is no another AAPL right now.

Did you take your own advice?

The hedge funds are out of Apple and they're not coming back. Anyone who thought like you and bought at $700 isn't getting their money back for at least a year, if ever. This is assuming Apple doesn't come out with something else revolutionary like the iPhone/iPad. But chances are slim to none at this point with the new management at the helm. Looks like now all they can do is make things bigger (iPhone) or make them smaller (iPad) and throw in tech that everyone else has had for a while (LTE, for example).



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