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August 25, 2014

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Well, that might be true for the US markets, but in the Indian stock markets where I have been investing for the past 10 years , the net returns for active mutual funds outperform the index funds by quite a wide margin, more than 10 per cent at least . The average return for my index fund has been 17% over the past 5 years and around 28% for my active stock mutual funds.The Indian market might have more inefficiencies or the index construction might be faulty, but as of now, active funds are the way to go in India , as well as , I suspect, other emerging markets

I was fortunate in several ways after I retired.

1) I started subscribing to a service that provided a huge database of mutual funds and analytical software that enabled one to pick out the current top performers amongst all of the available mutual funds. It took me several weeks to learn how to use the analytical tools provided to find the "hot" funds. This is where my engineering background and knowledge came in very useful.

2) Simultaneously with this the dot.com bubble was just getting started and I was soon able to find several mutual funds with very active managers that were doing a great job in finding the hot companies that were loading up on the stocks that were leading the way during this "once in my lifetime" bubble.

3) I had just retired with a portfolio valued at $320,000 at the end of 1992. I started buying the best 4 or 5 performers among these funds and rode them up all the way to the top. By the time the bubble finally burst I had got completely out and into the safety of bond funds and on March 6th. 2000 our portfolio peaked out at $3,300,000. The market index that was the big mover during this time was the Nasdaq 100. After that tenfold gain I became much more conservative and even though I have more than doubled our portfolio since then I now value safety, low volatility & the avoidance of stress most of all.

"Instead, spend your time and effort working on growing your career -- something you can impact and which will yield much bigger dividends in the long term."

Best possible advice, really.

All of my investments are in index funds, with the exception of a little bit in one Vanguard managed fund (with an 0.25% fee). While I can't guarantee I'll never put a small speculative plunge, it sure as heck won't be in managed equities.

I invested $1 in the stock market back in 1972. Now it is worth $12,567,897. The way I picked stocks is I closed my eyes and randomly pointed to the ticker symbol in the newspaper.

I know you're an index purist, FMF...but Morningstar just did an article today showing that cheap actively managed funds typically beat index funds. They showed that most of Vanguard's actively managed funds actually beat their peer index funds. They found similar, but not quite as good, results for other cheap actively managed funds. Granted, there aren't that many cheap actively funds that are out there, but they're there, most of them with Vanguard itself. The next cheapest fund family would be Dodge & Cox. Also, some people can get cheap "Institutional" share classes of mutual funds in their 401ks. For example, I have the cheap "R5" share class of American Funds EuroPacific Growth in my plan at work (.65% including admin. fee) as well as Growth Fund of America R5 (.49% including admin. fee), among others.

I don't knock index funds....but I do think it's worth paying a premium for active management if that premium is small, and while this is an admittedly riskier strategy since we can't know the future, it isn't an irrational one.


Something tells me YoungLimey is not serious

So-- If Old Limey is Old, Young Limey is Young and Limey Junior is the "next generation"..... I guess I am the "tart" one.

Vanguard index funds are an excellent way to go, however they're far from perfect. I take exception to #4. Market cap weighting, by definition, overweights the most expensive stocks and underweights the cheapest.

If costs are what matters, what prevents an investor from purchasing a basket of high quality blue chips directly and get their costs down to ZERO? This is a legitimate option for those with adequate portfolios, and is likely to outperform most funds because it has no expense drag whatsoever. I figure 30 or so DOW or Dividend Aristocrats should do the trick. Buy, hold & never sell.

I think because cost is based on portfolio value and not income/gains (and thus the cost percentages are based on the whole portfolio value) its extremely easy to underestimate the effect of these costs. I used to view a money manager who takes 1% to handle your portfolio costs 1% (generally an additional 1%, cause the other costs are still there)

Now I realize the 1% of the portfolio is not the number to think about, if I average 7%/year then he's taking one-seventh of my income/gains every year!

Strick
If you reach the point later in your life where tax exempt bonds become attractive you won't have to worry about a money manager siphoning off 1% or more of your gains.

I am getting an average of 4.935%/annum on a basket of 3,850 municipal bonds with maturities ranging from 2015 to 2050. Once you have bought a bond there are no fees whatsoever. If you also buy bonds issued by the state in which you live they are also free of state and federal taxes. Of course 4.935% is not going to make you rich but if all you are looking for is tax free income after you have retired they are quite attractive.

I am a Fidelity customer and they maintain a comprehensive inventory of muni bonds. I have very seldom needed to sell a bond but Fidelity has a fixed income department that can sell bonds for you if desired.
The other thing is that if you buy a bond below its par value of $1,000 you will receive $1,000/bond when they mature so there is also the possibility of picking up some capital gains.

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