Jump to content
Sign in to follow this  
tony

Index Funds Prove Their Worth

Recommended Posts

Regarding the article and study, consistency is much less important than long term risk adjusted performance.

 

Lower Expense Ratios (Often Seen in Index Funds) in Mutual Funds Do Not Guarantee Lower Risk or Better Performance

 

Vanguard Total Stock Mkt Idx (VTSMX) ; Expense Ratio=0.18%; 3 Yr Sharpe Ratio= -0.36; 5Yr Avg Annual Return=1.17%; 10 Yr Avg Annual Return=0.10%

 

American Funds Gw Fund of Amer A (AGTHX.LW); Expense Ratio=0.76%; 3 Yr Sharpe Ratio= -0.28; 5Yr Avg Annual Return=3.06; 10 Yr Avg Annual Return=3.19%

 

Fidelity Contrafund (FCNTX) ; Expense Ratio=0.95%; 3 Yr Sharpe Ratio= -0.19; 5Yr Avg Annual Return=4.86; 10 Yr Avg Annual Return=3.73%

 

 

The performance data quoted represents past performance, and past performance is not a guarantee of future results.

Performance Data as of 11/24/09

Source: Morningstar

Share this post


Link to post
Share on other sites

Regarding the article and study, consistency is much less important than long term risk adjusted performance.

 

Lower Expense Ratios (Often Seen in Index Funds) in Mutual Funds Do Not Guarantee Lower Risk or Better Performance

 

Vanguard Total Stock Mkt Idx (VTSMX) ; Expense Ratio=0.18%; 3 Yr Sharpe Ratio= -0.36; 5Yr Avg Annual Return=1.17%; 10 Yr Avg Annual Return=0.10%

 

American Funds Gw Fund of Amer A (AGTHX.LW); Expense Ratio=0.76%; 3 Yr Sharpe Ratio= -0.28; 5Yr Avg Annual Return=3.06; 10 Yr Avg Annual Return=3.19%

 

Fidelity Contrafund (FCNTX) ; Expense Ratio=0.95%; 3 Yr Sharpe Ratio= -0.19; 5Yr Avg Annual Return=4.86; 10 Yr Avg Annual Return=3.73%

 

 

The performance data quoted represents past performance, and past performance is not a guarantee of future results.

Performance Data as of 11/24/09

Source: Morningstar

 

 

finadvnj,

You are misrepresenting the data in two ways: First, you are comparing apples (TSM Index) with oranges (Growth Fund of American) and 2nd, The following statement really means something: "The performance data quoted represents past performance, and past performance is not a guarantee of future results". But you are implying that for the future, investors should avoid the indexes and use the American funds or the Fidelity contrafund instead because according to your analysis, costs and management are worth the risk and beat the TSM index (all according to past performance which is true, but its PAST DATA).

Nobody can predict the future.

Have a good weekend,

Steve

 

Share this post


Link to post
Share on other sites

Geez, Stevie, I go away for a while and when I come back, what do I find? Another person (finadvnj) who misunderstands index funds.

 

"... consistency is much less important than long term risk adjusted performance."

 

... to which I say, I am not interested in long term risk adjusted performance. I am merely interested in matching market returns. Index funds allow me to do that at low cost, so I am content with that. Over time, this has been a reasonably profitable strategy.

Share this post


Link to post
Share on other sites

Hey AP,

How in the heck are you? I miss you. Good to see your writing again. You have a way of getting right to the point. I love all that you write, even when you are critical of our president who inherited a MESS. But I digress.

 

finadvnj is new to this forum and has not yet learned that we know all of the sales crap that comes and goes around here month after month and year after year. I keep waiting for one professional who actually admits that he or she has learned something good about index investing, but so far, no body that I remember has. Scotty came here and taught us about investing, he is sooooo good.

 

Keep coming back and maybe that one pro will admit that being a fee only professional that is a fiduciary is also good for business. Scotty is very busy.

 

My warmest regards,

Steve

 

Share this post


Link to post
Share on other sites

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

 

Share this post


Link to post
Share on other sites

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

 

Where in the sam h... do you get your data? And your logic is totally false and you are again misrepresenting the facts. An index fund cannot underperform or outperform the averages, unless it really is not an index. For example, Dreyfus S&P index will underperform the s&p 500 index because of its horrendous fees.

Those "facts" that you say speak for themselves are all past performance and WHO CARES? Except for the sales force to impress people. Yes, you are implying that managed funds will beat the averages, in fact, you are guaranteeing that they will in a round about way.

 

You better be careful what you say about guarantees:

Here is what William Bernstein says about managers sales pitches and managed funds:

 

PILLAR ONE--Investment Theory:

 

"Anyone promising high returns with low risk is guilty of fraud."

 

"The market is brutally efficient and can be thought of as being smarter than even its wisest individual participants."

 

"Stock picking and market timing are expensive, risky, and ultimately futile excercises."

 

"A prudent course is to make the broad market and a lesser amount of small U.S. and large foreign stocks your core stock holdings."

 

 

"No one--not the pundits from the big brokerage firms, not the newsletter writers, not the mutual fund managers, and certainly not your broker--can predict where the market will go tomorrow or next year."

 

 

"The fundamental investment choice faced by any individual is the overall stock/bond mix."

 

 

 

Share this post


Link to post
Share on other sites

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

 

Oh, vey. (And I'm not even ######ish)

 

Yes, if one invests in an index fund, one will underperform the index to the extent of the fund's expenses. For example, my wife has Vanguard TSM Institutional, with an expense ratio of .06. That means that her fund will underperform the index by .06. I'm willing to live with that.

 

Saying that there is no guarantee that an actively managed fund will not underperform the index is meaningless to an investor like me. I'm very happy with market returns. I don't need to outperform the markets, and I have absolutely no confidence whatsoever that an actively managed fund will be able to do so based upon past performance.

 

I don't mean to speak for Stevie, but I'm guessing that he will agree: all we want is market returns at low costs.

Share this post


Link to post
Share on other sites

 

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

 

Oh, vey. (And I'm not even ######ish)

 

Yes, if one invests in an index fund, one will underperform the index to the extent of the fund's expenses. For example, my wife has Vanguard TSM Institutional, with an expense ratio of .06. That means that her fund will underperform the index by .06. I'm willing to live with that.

 

Saying that there is no guarantee that an actively managed fund will not underperform the index is meaningless to an investor like me. I'm very happy with market returns. I don't need to outperform the markets, and I have absolutely no confidence whatsoever that an actively managed fund will be able to do so based upon past performance.

 

I don't mean to speak for Stevie, but I'm guessing that he will agree: all we want is market returns at low costs.

 

Ap,

 

Yep, market returns at low cost is the only way to go. Nobody has a crystal ball. I only wish I had the market averages all of these years, I would have twice as much in my 403b if I did.

 

Steve

Share this post


Link to post
Share on other sites

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

Sir,

 

I'm just wondering how you would respond to a client who tells you that he is not interested in outperforming the markets, but instead is merely interested in matching the markets' returns.

Share this post


Link to post
Share on other sites

Hi AP, I hope everything is well with you............by the way it's Oy Vey..............unless you are singing Hernando's Hideaway, then it's O-le!

 

Cheers,

 

Ira

Share this post


Link to post
Share on other sites

Hi AP, I hope everything is well with you............by the way it's Oy Vey..............unless you are singing Hernando's Hideaway, then it's O-le!

 

Cheers,

 

Ira

 

 

Great to see both of you back!

Ira, did you go to the Bogleheads meeting in LA?

Steve

Share this post


Link to post
Share on other sites

Steve,

 

To be honest, I've been having some medical issues, so I have been doing a lot of research.....that is where much of my time has been..............so, I didn't know about the meeting......I haven't taken a very active roll in investing in the last year........I haven't been to the bogle site...........as you know I hold a diversified portfolio, mainly of low cost index funds, and it really doesn't take much to manage this.....whereas if I invested in individual stocks or managed funds I would have to watch a lot closer....for the managed funds I would have to see if there are any management changes, or changes in the direction that the fund takes as far as sector, corporate size, aggressiveness, etc. etc. , and for individual stocks I would have to be careful of individual stock risk, etc.

 

Ira

 

Share this post


Link to post
Share on other sites

 

I am not implying anything.

 

The facts speak for themselves.

 

In the vast majority of instances, you are guaranteed to underperform the index by using an index fund.

 

In the vast majority of instances, you are not guaranteed to underperform the index by using an actively managed fund.

 

Sir,

 

I'm just wondering how you would respond to a client who tells you that he is not interested in outperforming the markets, but instead is merely interested in matching the markets' returns.

 

 

 

I would tell them the inherent costs of virtually every index funds guarantees them they will underperform the index.

 

Inherent costs and transactions costs of virtually every ETF guarantees them they will underperform the index.

 

There are a small number of institutional index funds (which often have $1 million minimum deposits) that can generate equal or better performance than index returns.

 

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...